Your Money - January 29th 2021

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Wow, what a week, what a month!  January 2nd seems like a year ago given the avalanche of headlines, political actions, Covid concerns, corporate earnings and to top it all off, a wild speculative ride driven by day traders doing their best to stick it to Wall Street Hedge fund sharks. Forget President Biden’s sweeping economic reforms, the cancellation of the keystone Pipeline and the banning of drilling on Federal Lands. That is yesterday’s news. Instead, day trading blogs like Reddit and Wallstreet bet’s are driving massive volumes and volatility that are playing havoc with traditional investment analysis. Indeed, they have stolen the headlines and focus away from earnings confession month and instead highlight what could be a symptom of too much liquidity in the financial system.

Take Gamestop Corp for example. A month ago this company was teetering on the edge of oblivion due in part to short selling hedge fund traders. In fairness, some could argue that virtually unregulated hedge fund traders can destroy companies at their whim. They sell short (stocks they don’t own) large blocks of a targeted company, then write or release a list of reasons why they think the company is over valued and then hope the publicity forces the company into financial and business ruin. The hedge funds then buy the stock back at pennies on the dollar and then look around for their next target.

But there is a new sheriff in town. It seems that a united crowd of commission free day traders latched on to the idea that if a hedge fund short sells most of the outstanding shares of a target company, and the stock instead starts to rise, eventually the short sellers will be forced to close out their positions in a hurry. Either that or face financial suicide. For example if I sell short 20 million shares of XYZ starting at $20, which represents half the of the shares outstanding, my actions are likely to cause the stock to drift down $15. Then I release a report saying why I think the company is worth $5 per share, existing shareholders may be scared into dumping their stock, thereby creating a downward spiral. I buy back said stock at $5 and make a huge profit.

This time around, somebody got the idea that if a big enough crowd of individual investors starting buying the stock along with derivatives like call options, the price would go up not down. That is not good news for the short sellers. They sold shares of a company they do not own and day traders have driven the stock up to $30, then $40, then $60. Remember they sold short 20 million shares. Every $10 bucks above their $20 sell price is a $200 million paper loss and their brokerage account is demanding cash to offset said paper loss aka Margin Call.

As a short seller, they have a couple of options. They can hold their short, sell their big name S&P stocks and pray the day traders get bored and sell their stock making XYZ fall again. Mind you if the stock goes to $40, they hedge fund manager is likely selling the family jet, the summer place at Martha’s Vineyard and cancelling their kids Platinum credit cards. The smart ones would likely start covering their shorts as the stock goes the wrong way to mitigate their losses. The very aggressive ones wait for the blow off and start shorting more stock at even higher prices.

In the case of Gamestop, the stock was trading at $19 on January 12th. On the 21st it was $43. On the 26th it hit $150 and today it closed at $325. Gamestop now has a market cap that theoretically would qualify it for inclusion into the S&P500. It has traded 500 million shares in the last week

Compare that to Microsoft, which reported great year-end financial results, traded 242 million shares and is up a mere $7.

In other news a huge swath of big name companies reported financial reports this week, but for the most part, their results were ignored in favor of this hyper trading environment by fearless millennials converging on targeted plays that are momentum leaders. We used to call this irrational exuberance. It was often quoted by former Fed Chairman Alan Greenspan right up until the internet market burst in 1999. Interestingly, this week the current Fed Chair Jay Powell all but shouted to Wall Street traders on Wednesday that next to zero interest rates are here to stay for the foreseeable future. So much so that the central bank has stated its comfortable with inflation running above its 2% target before even considering raising interest rates.

Lastly, the ongoing Covid crisis got a boost when both Novavax and JNJ reported successful clinical trial results and are applying for approval of its vaccines. Novavax shot up 64% today and 74% this week. JNJ on the other hand is flat. Likewise with Pfizer. They received approval over a month ago and are selling their vaccine as quickly as they can make it. Stock unchanged. Eli Lilly, another large pharma stock reported a 41% increase in profits, thanks in part to Covid medication sales, saw its stock price decline 1% today.

I forget to mention, Canadian stocks were not immune to day trader’s attention. Blackberry stock closed at $17.86 last Friday, got the momentum ride on Monday, hit $36 on Wednesday and closed at $17.96 today. One possible reason could be the fickle nature of the day traders. Once the stock cleared $36, the juice was not worth the squeeze. Plus I heard one rumor that day traders had turned their attention to silver stocks as the shiny metal jumped 5% this week.

Bottom line, this kind of frothiness does not last long and patient investors can still buy value stocks that are currently being ignored by the momentum horde. As a bit of a contrarian I look at TC Energy (Formerly Trans Canada Pipeline.) They were delivered an ugly blow by the new Biden Administration with the cancellation of the Keystone XL Pipeline expansion. This means cashflow earmarked to fund the development of that project can now be diverted to other projects. The buzzword is hydrogen production and transportation. It’s a clean energy fuel that can be derived from natural gas which can be used as an “on demand” fuel source. If governments accelerate the adoption of electric vehicles, it begs the question of where will the electricity come from?

While solar and wind are laudable, they don’t work 24/7. In fact they might not work at all during certain times that require an immediate electricity draw. I envision pipeline companies installing wind and solar operations and take the excess power production and use it to create hydrogen from either electrolysis or stripping it from natural gas.  It’s a long term vision but given the 5.9% dividend, I am happy to wait.

Happy trading.

Stay Safe.

Information contained herein represents the views of the writer and not those of PI Financial Corp., and based on assumptions which the writer believes to be reasonable. The material contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This information is intended for distribution in those jurisdictions where PI Financial is registered as an advisor or a dealer in securities. Any distribution or dissemination of this article in any other jurisdiction is strictly prohibited. PI Financial and/or its’ officers, directors, employees and affiliates may, from time to time, acquire, hold or sell a position in the securities mentioned herein.

Steve Bokor

Steve Bokor

Portfolio Manager