Capital 19 Catch-Up

GameStop Hedge Fund Drama Pushes Major Indicies Negative For January As Apple Has Its First $100 Billion Quarter Ever

The major indices all lost ground during the week as heavy selling drove the Dow and the S&P to finish with losses in the first month of 2021. Mixed earnings results from some of the biggest hitters in the market failed to stem the apprehension which emerged from the unlikely war that erupted between retail traders and hedge funds. The battle sent stock prices on a rollercoaster ride we haven’t seen for months.

After four years with an unhinged TV celebrity as US President, and a global pandemic the likes of which we hadn’t seen for nigh on 100 years, I expected 2021 to be relatively “shock-free” in comparison. Yet the events of this week had me shaking my head in wonder yet again. At least this time, however, humanity wasn’t at stake in any way, and I could sit back and enjoy the chaos from a safe distance.

The pandemic was all but forgotten on Wall Street this week, as was the impending $1.9 trillion stimulus package. The GameStop saga was all anyone could talk about. The drama was picked up by much of the mainstream media as well, which left the general population wondering what on earth was happening. If you’re not involved in the markets the terms shorting, day-trading, hedge fund, and short-squeeze can seem very confusing.

For those that somehow missed all the drama, and to cut a long story short, speculative traders in a Reddit chatroom called “Wall Street Bets” felt aggrieved at the comments of hedge fund Citron Capital who said they were shorting one of the chat rooms favourite stocks GameStop. They decided to pool their resources and encourage everyone to buy Gamestop shares regardless of the price, thereby pushing the price up and squeezing out the short-sellers.

The movement was unbelievably successful. GameStop was up 400% for the week and is now up more than 1600% in January. Other stocks such as Bed Bath and Beyond (BBBY) and AMC (AMC) were also included in the buying frenzy and also experienced massive returns. The schemes unexpected success saw brokers across the country restricting trading in the stocks by the middle of the week. Partly in fear that liquidity could be compromised and in part to protect their users from suffering large losses. The SEC were blowing up a treat and politicians were demanding action for their rich hedge fund donors who were being picked on. Crazy scenes.

I won’t go into too much detail here as we have done a comprehensive article on the issue which is up on our blog, and which you can find in the Stock Report section of the Catch-Up today. Just click on the link from today’s email. It goes into much more detail there and offers some advice on how we should react as investors. If you’d like to dig deeper into what happened this week, and if you’re after a more detailed explanation about what has been going on then please give it a read.

Even though the drama was restricted to half a dozen or so stocks it still managed to have an impact on the rest of the market. When confusing things happen on Wall Street investors tend to sell first and ask questions later. Traders were worried that some hedge funds may go under or that they would have to sell off other stocks to cover the shortfalls. And that may be partially true but in the long run, it’s going to have very little impact on anyone outside of the situation. If you’re a hedge fund with a large number of short positions I would be a little concerned at the moment. For the rest of us let’s just sit back and enjoy the little guy getting a win over the big guy for a change. And if you hold any of the stocks mentioned above, sell your stocks and take the money and run.

All of the major indices lost more than 3% for the week that closed out the month. This pushed the Dow to a 2% loss for January, while the S&P500 lost 1.1% to start the year. The Nasdaq managed to eke out a 1.4% gain despite the late falls. As an aside the Capital 19 Top 30 stocks made an impressive 8.3% return for the month. The new list of stocks for February came out this morning if you’re on the Top 30 email list. It continues to go from strength to strength, so if you’d like to be a part of it just contact your advisor.

Away from the Gamestop drama, we had some massive earnings reports drop during the week. Early results saw General Electric (GE), Johnson and Johnson (JNJ), and 3M (MMM) all have wins and gain 2.7%, 2%, and 3.3% respectively. Microsoft (MSFT) was up 6% after hours as revenue growth accelerated and guidance beat forecasts. Unfortunately, it’s next full day of trading came on what was the worst trading day in more than three months and the stock price gained only 0.3%.

Microsoft wasn’t the only one that couldn’t turn a positive result into share price success, however. Catch Up favourite Apple (AAPL)blew away expectations and locked in its first $100 billion revenue quarter ever ($114 billion to be exact). Sales were up by 21% year on year with every product category experiencing double-digit growth. iPhone revenue was up 17%, services revenue was up 24%, mac revenue was up 21%, and iPad revenue was up an impressive 41%. Revenue from its “other” category, which includes Apple Watch and headphones amongst other devices was up 29%.

The Apple result was despite coronavirus lockdowns impacting access to some Apple store locations. There are now 1.65 billion active Apple users globally. It’s why we think there services segment will expand exponentially in future earnings reports. When you have that many people locked into the ecosystem selling them on subscriptions is money for jam. Despite the successful report, Apple fell 3.3% in the following session. The fall was unexpected but is possibly due to a failure to offer guidance for the next quarter, something Apple hasn’t done since the start of the pandemic. Or maybe traders suspect a pullback after such a successful quarter. It’s hard to say.

Tesla (TSLA) had a small beat on revenue expectations but missed on profit and dropped 3.3% after it announced its figures. Plane manufacturer Boeing (BA) suffered a record loss of $11.9 billion in the fourth quarter and dropped 4%. American Airlines (AAL) had a small win over expectations, but it was enough to send the beleaguered airline 11% higher after benefiting from its own short squeeze, suspected from the same Wall Street Bets community that have targeted GameStop. Airline CEO Doug Parker called it the ” most challenging year in our company’s history”.

American Express (AXP) beat expectations but fell 4% on concerns from management over the pace of the economic recovery in 2021. Rivals Visa (V) and Mastercard (MA) fared slightly better and took advantage of reporting ahead of the more successful Thursday session gaining 1.6% and 3.5% respectively. Fast food giant McDonald’s missed expectations, citing impacts on capacity and operating hours across many global locations. It recorded $30 million in restaurant closing costs for the quarter.

GDP rose 4% in the final quarter of 2020, however, the number fell short of the economic boffin’s expectation of a 4.3% gain. Weekly jobless claims came in at 847,000 to end the month which beat expectations of 875,000. The Federal Reserve kept the interest rate steady at near 0% and said they would continue to purchase $120 billion in assets per month. The news failed to excite markets, as the fed also warned of a cautious economic start to 2021.

In the week ahead the story will continue to be the GameStop saga and the battle of the retailers over the large hedge funds. It will be fascinating to see what happens here. Will the fairytale finally crash and see stock prices return to reality? Or will the movement gain even further traction and send prices higher? Whatever happens, the game of “hot potato” being played over these stocks at the moment will be a beauty.

The big earnings results will continue to come in with the likes of Alibaba (BABA), Pfizer (PFE), Alphabet (GOOGL), Amazon (AMZN), Exxon Mobil (XOM), eBay (EBAY), PayPal (PYPL), Spotify (SPOT), Snap (SNAP), and Ford (F). While the economic data will include durable goods orders, and construction spending, but culminate in the non-farm payrolls to end out the week.

Have a good one.