Episode 37: Super Freak
This week witnessed a financial David vs. Goliath story. In one corner were professional short-sellers and large hedge funds pitted against a band of 20-year-olds using a free-trading app and funded with $600 stimulus checks. The fight is not over, but Goliath is bleeding with a broken jaw and a punctured lung. President Biden continued pumping out Executive Orders, surpassing those written by Trump, Obama, and Bush combined at this point in their presidency. The Senate’s trial for the Trump Impeachment is moving forward, but the prospects for a conviction are unlikely. The world topped 100 million confirmed coronavirus cases (26% of those cases in the US). Still, there is positive news that the 7-day moving average for most COVID indicators is finally declining.
TRUMP IMPEACHMENT
In a 55-45 vote, US Senators rejected a motion to dismiss former President Trump’s impeachment trial. The outcome means that the prosecution will go ahead as planned on February 8th but shows that Trump is unlikely to be found guilty of the insurrection charge. All but five Republican Senators argued that a former official’s impeachment is unconstitutional and should not proceed. Therefore, it’s improbable the Democrats will sway 17 Republicans to vote for conviction. Former President Trump is assembling a legal team, headed by Butch Bowers, a South Carolina lawyer.
The Department of Homeland Security (DHS) issued a National Terrorism bulletin warning of domestic extremists’ potential attacks in the next few weeks. The DHS listed “anger over COVID restrictions, the 2020 election results, and police use of force” as possible motivations. They should have named Legislator Majorie Taylor Greene as a co-conspirator. Greene is a freshman Republican Congresswoman from North Georgia, who indicated support for executing prominent Democrats before running for Congress. Greene notoriously ran for office last year as a QAnon supporter and won her seat. Greene’s Facebook page contained rants from followers with disturbing comments, including one follower who wrote, “A bullet to the head would be easier to remove Pelosi,” and Greene “liked” the statement.
Further, Greene indicated in speeches captured on video that Pelosi was guilty of treason and suggested the penalty could be execution. Greene is on YouTube saying “Q, is anonymous” and describes him as “a patriot” and “very pro-Trump with connections at the highest level.” She states that there is evidence of “satan worshippers in our government and that Hillary Clinton is involved.” She continued, “I’m very excited about that now there’s a once-in-a-lifetime opportunity to take this global cabal of Satan-worshiping pedophiles out, and I think we have the president to do it.” The fact that constituents are so obtuse as to vote a Super Freak like Greene into Congress is incomprehensible.
POLITICS
President Biden signed a string of executive orders to reduce greenhouse gas emissions and transition to a carbon-free economy. Biden said the policies announced are designed to “confront the existential threat of climate change.” The Biden administration has pledged to reduce emissions from the power sector to zero by 2035 and overall by 2050. At present, 63% of the country’s power is produced by burning fossil fuels, 20% comes from nuclear plants, and 18% from renewable energy sources, including wind, solar, and hydro.
COVID
The US may be in the very early stages of herd immunity. Roughly 100 million Americans seem to have had the virus. (There are 26 million confirmed cases. For every person who tests positive, studies suggest three more have had it without being diagnosed.) Another 25 million people have received a vaccine shot. Together, this means about one-third of all Americans have at least some immunity from the virus. Consequently, new COVID cases in the US have fallen 35% over the past three weeks. Finally, a sign of cautious optimism when it comes to the pandemic.
One piece of concerning news is the emergence of variants of the virus from countries such as the UK, Brazil, and South Africa. South Carolina reported the first known US cases of B1351, the coronavirus variant initially discovered in South Africa. The concern is certain vaccines may be less effective with the new variants. The Novavax vaccine is 90% effective but only 49% effective against the South African variant. Therefore, it’s a race between distribution and adoption of the vaccine vs. the spread of the mutation. Biden administration is planning to purchase an additional 200 million doses of the COVID vaccine. Federal officials are negotiating for a new supply of 100 million doses each from Moderna and Pfizer, which would boost the nation’s total vaccine capacity to 600 million. That would give the US the ability to vaccinate 300 million Americans. Plus, the government is expecting the arrival of a third vaccine from J&J by summer. The J&J vaccine will only require one shot, and the government has preordered 100 million doses. Biden announced that vaccine shipments would increase 16% to 10 million a week spread across all 50 states. The Biden administration is also committing to giving states estimates of how many vaccines they will receive at least three weeks in advance so local officials can plan accordingly. According to the CDC, the government has distributed 48 million shots but only vaccinated 26 million people. Many states have expanded groups eligible for the vaccine to speed up immunizations. Yet, several states complained that they are running low on supply, and the Department of Health and Human Services issued a warning of vaccine scams and how to avoid them.
RACE AND AMERICA: Part 2
Last week, I offered a balance sheet of where things stand on race in the country. The upshot is when it comes to race in America, we have made meaningful progress, but problems persist. The data is undeniable, and there’s no way to logically and rationally look at the statistics and conclude Blacks and Whites are starting life’s race at the same starting point. Whites have a distinct advantage, and that advantage grows at various life markers. The bigger question is, “who cares?” Why does this topic matter?
Social justice is the siren song when it comes to most diversity initiatives. Yes, addressing systemic racism is a moral imperative, and many have made valiant efforts to enact change. Further, I think most Americans would say that fairness is part of our country’s value system. However, arguing that social justice will create meaningful and lasting change is specious. It’s similar to environmental issues. Most Americans will say they favor a clean environment and support measures that make our air cleaner, our water purer, and our ecosystem healthier. However, they are not willing to pay a higher price or lower convenience to achieve these results. Adoption of “going green” happens when you make it easy and affordable. The same is true when it comes to progress on race.
Collectively, we must understand that the pie gets bigger by including more people at the table. On a macro level, McKinsey research showed that the concentration of wealth among America’s highest earners would cost the economy up to $1.5 trillion over the next eight years. The wealth gap reduces black families’ buying power and prevents investment in the housing and equities markets. The report suggests if the gap between black and white families were closed, the US would add 4% - 6% to GDP by 2028.
There’s compelling data that businesses operate better and perform at higher levels when diversity is present. The McKinsey report found that companies in the top quartile for gender diversity on the executive teams were 15% more likely to experience financial returns above their respective national industry medians. For ethnic and cultural diversity, the finding was a 35% likelihood of outperformance. However, diversity for the sake of checking boxes won’t work. Diversity only works within an egalitarian company culture that elevates different voices, integrates contrasting insights, and welcomes diversity conversations.
ECONOMY
The US economy contracted 3.5% in 2020, its worst performance since World War II. The surge in growth Q3 (33.4%) and Q4 (4%) did not compensate for the horrific decline in Q2 related to the pandemic. Of course, the contraction would have been much worse had it not been for an accommodative monetary policy by the central bank and massive government stimulus. The IMF forecast that the US economy will expand by 5.1% this year.
The Federal Reserve confirmed that interest rates would remain near zero and asset purchases unchanged for the foreseeable future. The policy is driven by a forecast for slowing growth and will likely remain unchanged until inflation exceeds the central bank’s 2% target. The current economy shows conflicting signs of inflation, with housing and materials costs pushing higher and services inflation lower. Today, the Fed’s preferred inflation gauge, the personal consumption expenditures deflator, announced a year over year increase of 1.4%. Chairman Powell’s commented that “improvements in the economy will depend significantly on the course of the virus, including progress on vaccinations.” The Fed will keep buying at least $120 billion of bonds a month. Since the beginning of the coronavirus, the Fed expanded its holdings by more than $3 trillion, bringing its balance sheet to nearly $7.5 trillion.
WALL STREET
GameStop is a mid-size brick and mortar game merchandise retailer selling “old school” physical video games. The company is headquartered in Grapevine, Texas, outside of Dallas, and operates 5,509 retail stores throughout the US, Canada, Australia, New Zealand, and Europe. It’s a legacy business that’s been out of favor for years, and the stock (GME) has struggled, attracting enormous short interest from “investors.” (GameStop has short interest that exceeds 100% of available shares. Betting against bricks-and-mortar retailers and on their online disrupters has been a popular theme among hedge funds for years.) Excluding this month, over the last five years, the GME stock high was around $30 per share and traded lower each year. The stock low for the previous 12 months was $2.57. This week the stock hit an all-time high of $483 intraday trading on Wednesday, representing an increase of over 18,000% from the low to high in the past year. To put this in perspective, If you invested $5,000 at $2.57, that investment on Wednesday would be worth approximately $1,000,000.
What happened?! Nothing material changed with the business. Instead, retail investors banded together on the social media network Reddit’s WallStreetBets message board and organized (a euphemism for colluded) to buy the GME stock that most Wall Street players are betting against. This headline might be confusing because it is confusing. Let me give you some backstory on WallStreetBets and short selling.
Jaime Rogozinki created Reddit’s WallStreetBets in 2012. He decided to create a hub on message-board operator Reddit where like-minded people could discuss trades exclusively. It was part of the nascent movement to democratize the investing world by breaking down entry barriers. The platform operated in obscurity for years until Charles Schwab and Fidelity Investments eliminated trading commissions, and interest in retail trading exploded. WallStreetBets subscribers soared and now boast 4 million members.
Short selling can be a lucrative way to profit if a stock drops in value. In essence, you are borrowing a stock and “selling” it at the current trading price because you believe the price will fall in the future, allowing you to buy it lower, locking in a profit. In other words, if a stock is trading at $10 and you short it, and the price drops to $7, you would make $3 per share on the trade. However, if the price doesn’t drop but instead goes up, you have to buy that stock at a higher price than you “sold” it, creating a loss. If the price goes up quickly or too high, short-sellers face a margin call, which means they have to put up more cash to support their (losing) short position. Theoretically, shorting can produce unlimited losses -- after all, there’s not an upper limit to how high a stock’s price can climb.
Hence, the game played out this week of retail investors buying GME in volume, pushing up the stock with enormous short interest by large hedge funds. As the price of the stock went up, short-sellers faced pressure in their trade. Some short sellers with deep pockets bought additional short positions; after all, all things being equal, if you liked the short at $10, then you loved the short at $30. However, at some point, you run out of cash and can be forced to settle your short position at the worst possible time. This is the danger of the short-selling game. Top hedge funds such as Melvin Capital Management and Maplelane Capital, who held short positions on GameStop, have experienced massive losses. Some funds that have sustained severe losses are seeking influxes of cash to help stabilize their firms. Steven A. Cohen’s Point72 Asset Management injected $2.5 billion in emergency financing into Melvin Monday.
To make this story more interesting, platforms like RobinHood and TD Ameritrade halted buying in GME yesterday. This freeze on buying sent the stock into a tailspin, dropping by almost 50%. Retail investors were apoplectic at the decision. In an interview with CNBC, RobinHood CEO Vlad Tenev said the company limited buying of specific highly volatile securities “to protect the firm and protect our customers.” Media, celebrities, and politicians from both sides of the aisle railed against the decision to halt trading and “protect wealthy hedge fund managers,” proving (yet again) the Wall Street game is rigged. RobinHood announced this morning that it would allow limited buying of these stocks today. The stock surged 67% today and closed at $325 per share. Meanwhile, Bank of America Corp. analysts, responding to GameStop’s roller-coaster ride, raised their price target to $10 from $1.60 — and reiterated their underperform.
The GameStop activity is not investing. It’s gambling. And when people gamble, people can get hurt financially. As the saying goes, there’s a fool in every room, and if you don’t know who it is, then it’s likely you. This gamification of trading seems fun on the cover, and who doesn’t love a David vs. Goliath story. However, this is real money, and it’s not going to end well for many people, probably for people who can’t afford to lose the money. For this reason, I wouldn’t recommend shorting stocks unless you are genuinely an expert investor. However, if you want to know how to do it, click here and don’t call me when you lose all of your money.
OTHER NEWS
The IRS won’t begin accepting 2020 tax returns until February 12. The pushed start date is due to the IRS’s need to do programming and testing of IRS systems following the tax law changes. The last day to file has yet to be pushed back from April 15. However, that could change due to the pandemic.
Also, newly elected President Joe Biden has a proposal for first-time homebuyers, giving them up to $15,000 to apply toward a downpayment. The tax credit is modeled on a homebuyer tax break put in place by then-President George W. Bush in 2008 during the Great Recession. However, Bush’s was an $8,000 loan you pay back on your tax return over ten years. Biden’s tax credit is a cash refund that a buyer can get immediately. If you wanted to buy a home in February, you can get the money and use it for a downpayment instead of waiting to receive the tax credit in 2022.
A state lawmaker in Oklahoma, Justin Humphrey, introduced a bill to create a Bigfoot hunting season to attract people to that part of the state. Humphrey proposed the season coincide with the annual Bigfoot festival. This story feels like something that typically happens in Florida and ends with a list of unintended negative consequences.
I. Below are the articles I found interesting the past week:
The whole messy, ridiculous GameStop saga in one sentence
Andrew Cuomo’s COVID performance may have been less stellar than it seemed
COVID variants will soon outnumber cases of original strain
II. Stats that made me go WOW!
- Analysis from Marketplace Pulse shows that 63% of new sellers joining Amazon.com are based in China. The proportion is even higher for Amazon’s marketplaces in Europe and Japan. As for sales, Chinese sellers now account for 39% in the US and over 50% elsewhere.
- Shares in an Australian nickel mining company gained as much as 50% yesterday, probably because its ticker symbol, GME, is the same as GameStop’s. Overeager investors failed to note this GME is listed on the Australian Securities Exchange, not the New York Stock Exchange.
- Here is a list of 10 highly shorted stocks that are soaring as Reddit traders waged war against top hedge funds.
- Apple exceeded analysts’ revenue expectations and reported $111 billion for Q4, 2020, up 21% YoY (highest ever). Profit for the quarter was $28.7 billion, up 30% YoY. The company reportedly sold 82 million smartphone units last quarter.
- General Motors will phase out gasoline and diesel-powered vehicles by 2035. The company plans to use 100% renewable energy to power its US facilities by 2030 and global facilities by 2035, five years ahead of a previously announced goal.
- Toyota overtook Volkswagen last year to become the world’s top-selling carmaker.
- Super Bowl XX will feature the Kansas City Chiefs vs. the Tampa Bay Buccaneers. Tom Brady is going for his 7th win in 10 appearances. Patrick Mahomes was in kindergarten when Tom Brady won his first Super Bowl. It will be the GOAT (greatest of all-time) against the kid (a baby goat is officially a kid)!
III. Name that Tune!
As I write this email, I am listening to “Super Freak” by Rick James.
https://m.youtube.com/watch/QYHxGBH6o4M
James Ambrose Johnson Jr, better known by his stage name Rick James, was an American singer-songwriter and record producer. He was born in 1948 and raised in Buffalo, New York. James entered the Navy as a teenager to avoid being drafted by the Army during the Vietnam war. After one year of service, James deserted the Navy and fled to Toronto, Canada, where he formed a rock band called The Mynah Birds, and signed a recording deal with Motown Records in 1966. Authorities eventually located James and sentenced him to a one-year sentence for desertion. After being released from prison, James moved to California to resume his music career.
The song “Super Freak” is one of James’ signature songs. He recorded it along with other tracks for the Street Songs album at the Record Plant in Sausalito, California. The song features background vocals from members of The Temptations. James reportedly recorded the song because he wanted to have something on the album that “white folks could dance to.” Rolling Stone magazine ranked the song number 477 in its list of 500 Greatest Songs of All Time
In 2004, James’ career returned to mainstream pop culture after he appeared in an episode of Chappelle’s Show that satirized James’ wild lifestyle in the 1980s. (Warning: the Chappelle skit contains content and language that some people may find offensive.) The Chappelle show renewed interest in James’ music, and he returned to perform on the road. James died later that year from heart failure at age 56. In the words of the late great Rick James, “cocaine is a hell of a drug.”
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