2021 Starts with The GameStop Show
Global indices started to feel some indigestion in the final week of January. Despite a 2% fall on the 27th, the MSCI World and S&P 500 still managed to rise 1.8% and 1.7% during the period. The TSX lagged, falling 0.6% during the month as the Canadian index gave back some of its outperformance during the final stretch in 2020. Similarly, the USD was weak as 2020 wound down but it pivoted in 2021, rising 0.5% and seemingly capping equity momentum.
President Joe Biden’s $1.9 trillion spending package, that includes $2,000 stimulus cheques, lifted expectations for future economic growth. This effort contributed to a boost in the 10-year yield from 0.96% to 1.14%. As this recap is being written, the rate is settling in at 1.03%. The US dollar and rates continue to be a primary focus due to its impact across assets. Federal Reserve Chairman Jerome Powell commented this week that the U.S. economy was a long way from full recovery and that tapering is not on the agenda for 2021.
On the commodity front, following a strong December where gold attempted a breakout to the upside following four months of weakness, the yellow metal gave back some of its gains in January, losing 1.8%. The upward momentum for oil carried on, as WTI rose 10.7%. Inflation has been a repeating theme in our monthly letters, and it is now gaining traction in broader financial circles. Sustained strength in key food input commodities like corn, wheat, and soybeans (up 18%, 8.5% and 4.7%, respectively) in January reinforced the inflation narrative. Industrial metals like copper and iron were closer to flat but still held tight after a major bull run through much of 2020. Despite this, the Consumer Price Index (CPI) rose only 1.4% year-over-year in December, (1.6% excluding food and energy) signalling inflation is still stalling. However, with inputs rising, it will be tough for the food index to remain stagnant. Moreover, the base effects of reduced rent in key urban centres where people are exiting should also be offset by increased rents on the back of home price appreciation that has been between 5-10% across several US states. Inflation implications across many asset classes is massive, as is the Fed’s reaction once inflation starts to creep above 2% on a sustainable basis.
Coming into 2021, GameStop (GME), a primarily bricks and mortar video game store, experienced a decline in operations for some time, and its stock followed suit, dropping from a high of $50 in 2013 to $19 to end 2020. Short-sellers, investors who bet on a fall in price, piled into the trade. More than 100% of the available shares were “sold short”. The price frenzy only hit news agencies this week, but the story actually started in August 2020, as activist investors like Ryan Cohen, the former CEO of Chewy Inc., started buying shares, leading to a Board shakeup and shift in the business’s focus. This is when the GameStop hype accelerated because WallStreetBets (a subreddit where participants discuss stock and options trading) discovered the combination of short interest and the promise for improving fundamentals. Millions of WallStreetBets users take concentrated positions to drive dealers to hedge through share purchases, and hedge funds to rush to cover shorts. This activity can produce aggressive and exaggerated price movements. Accordingly, a monumental 20x year-to- date return ensued. As a result, at least one prominent hedge fund, Melvin Capital, was forced to take a $2.75 billion infusion of cash from Citadel Securities and Point72 to avoid failure. While Melvin is the poster-boy, reverberations across markets forced de-leveraging across capital markets, ultimately contributing to the S&P 500’s 2.4% slide on 27-Jan-21. On the same day, GME was up 135%.
“Redditors” have also set their sights on AMC (the theatre operator) and bygone market darling Blackberry. Surely opportunistic funds have joined the rally and added fuel to the fire, and the underlying tone within the message boards is not solely of money-making, there is a tone of class warfare, sending a message to those seen as taking advantage of retail investors for years. Wall St. wasted no time honouring their reputation, plotting to temporarily shutdown various subreddits, while brokerages across North America delayed or halted trading in these names. More recently Robinhood, a retail brokerage, banned trading in popular Reddit names. Time will tell how broad the impact will be, but it seems the show is still in Season 1.