Last week, US equity indices fell more than 3% as hordes of US retail investors
‘stormed the gates’ of the hedge fund industry. The phenomenon resulted from the pairing of millions of Americans in Reddit chatrooms like WallStreetBets and StockTwits with booming mobile apps like Robinhood Markets, which offers free margin and options trading.
The resulting onslaught pushed the share price of GameStop and other so-called ‘meme stocks’ such as AMC
Entertainment, AMC Networks, Bed Bath & Beyond, Blackberry, Build-A-Bear Workshop (all with tickers starting ‘BB’), Macy’s, Dillard’s, Tootsie Roll, Koss and iRobot into orbit.
The big short (squeeze)
Hedge fund losses were estimated at $20bn, at one point on Thursday
(28 Jan) shares in GameStop were up some 2,000% for the month making
the business worth more than half the companies in the S&P 500 Index.
When investors ‘short’ a stock (betting the price will go down) they effectively borrow the shares and sell them in the expectation that they can buy them back later at a greatly reduced price, return the shares and pocket the difference. But if the share price rises, short sellers must scrabble to buy back the shares to limit their losses.
This is what’s known as a ‘short squeeze’ (or ‘burn’), which naturally pushes share prices still higher. Because Robinhood investors used masses of options trades, they also created what’s called a ‘gamma squeeze’ where options dealers are likewise forced to buy more of a stock to hedge their positions.
As Quilter Investors head of dealing Jonathan Callow explains, “Hedge funds had borrowed and sold more shares than GameStop had issued. This put a little blood in the water which, ultimately, attracted a ‘flash-mob’ of Reddit investors and a ‘feeding frenzy’ ensued.
“However, momentum is ebbing fast. Short interest in GameStop had plummeted from 114% in mid-January to around 39% of the company’s free-floating shares by Tuesday [2 Feb]. New short sellers are now coming in
fast while shares in GameStop and AMC are in freefall. Meanwhile, we wait to see where the next flash-mob will materialise,” he says.
After seeing its shares gain some 850% since the start of 2020 and entering the S&P 500 Index as one of the biggest beasts in the market, Tesla shares initially retreated some 7% after it
announced its first results as a ‘blue chip’ stock on Wednesday (27 Jan).
Tesla’s fourth quarter was a mixed bag with lower-thanexpected profits on record revenues. Profits came in at 80 cents a share – missing analysts’ forecasts of $1.03 – while operating margins shrank to 5.4% (from 9.2%) due to price cuts in China, supply-chain costs and generous pay-outs for CEO Elon Musk and his board.
Cynics pointed out that Tesla’s first full-year profit was significantly buoyed by $1.58bn from selling regulatory credits to other car makers. However, it said it expects to beat the 50% growth in output it achieved in 2020 by using its substantial “war chest” to invest in new factories and battery technology with a range of new releases and upgrades to existing models in the works.
Apple, the world’s most valuable company, announced its biggest quarterly revenues of all time on Wednesday (27 Jan). It raked in $111.4bn in the last quarter of 2020, despite having to close many of its shops.
Total sales jumped 21% year-on-year to produce the first quarter where revenues have topped $100bn thanks to double-digit percentage gains in every product category. Earnings per share came in at $1.68, soaring past analysts’ estimates of $1.41, with the company declaring a $0.205 cents per share dividend after lavishing $30bn on share buybacks during the quarter.
Apple has been a major beneficiary of lockdown with millions of customers upgrading their devices. iPhone revenues jumped 17% on the year (to $65.6bn) following October’s release of the iPhone 12 5G models; sales of the Apple Watch, AirPod and Beats headphones jumped 29% (to $13bn); Mac and iPad sales surged 21% and 41% respectively, while revenues in its services business (the App Store, Apple Music and Apple TV+) jumped
24% to $15.8bn.
