David vs Big-Hedge-Fund Yields Short-Covering Rally

2021-02-01 Market Update, by Chris Perras.

Sideshow Bob – GME, BB, BBBY, AMC

Equity markets were down last week, starting strong but reversing Wednesday on increased volatility caused by hedge fund delivering due to raids on their short positions including GME (GameStop), AMC (AMC Entertainment), BBBY (Bed Bath), and BB (Blackberry).  The S&P 500 slumped 3.3% last. Most equity averages pulled back from the prior week’s all-time highs despite some high-profile Q4 earnings beats including MSFT, FB, SWKS, INTC, JNJ, and a myriad of mid-sized companies.

Last week’s story is now well-documented.  An army of Reddit-based traders zeroed in on a basket of heavily shorted stocks; triggered a big, short-covering rally; and the smell of hedge-fund blood in the water, as well as highly-public interest from figures such as Elon Musk among other factors, swelled the number of retail traders in these positions, and sent the number of registered members of the original Reddit forum r/WallStreetBets rocketing to over six million (My 22 year old engineering student son Aidan has been talking about this Reddit Forum for 4 years). There are certainly some interesting stories born out of this (who is going to make the movie?) such as “little guy versus the big hedge fund,” and how payment for order flow as well as custody and settlement in stocks work and what capital they require.

Bonds and the dollar

The 10-year U.S. Treasury yields briefly broke below 1%, before ending the week almost unchanged at 1.07%. We see yields troughing here for the rest of the year led by a pickup in “Real growth” not “Inflationary growth.” The U.S. dollar broke its downward trend, even as the Fed pledged to keep policy wide open. Commodity prices were broadly unchanged with strength in silver which is an economically sensitive metal much like copper.

Economy

Economic data recap:  ISM Manufacturing PMI for January ended 2020 on a strong note, at 60.5, which was the second highest level in more than 16½ years. Expect some Q1 slowdown from that high.

Also, construction spending should show a decent 0.8% increase in December, paced by the residential sector.  Auto sales for January are expected to slow slightly from December’s clip.

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