Don't Stop Believin'

Remember that time a bunch of amatuer traders thought they would take down the whole financial industry? I’m sorry, but I have to go here. I’m sure you’ve already read/listened to a ton about r/WSB and GME. Did Melvin Capital need a $2.7B bailout? That’s the word, and there were apparently other big losses because of these price spikes. The WSB crowd did not however shake the foundation of the industry. There were actually quite a few firms that have made out like bandits and continue to do so. Virtu Financial and Citadel are both major market makers that see tons of flow from RobinHood. The increased volatility, spreads, and volume has likely been very good for their bottom line. We’ll get more insight on this when Virtu (VIRT.O) reports next week. The other highly covered name AMC, was up 13% last week and the 6th largest traded name by turnover last week at $8.4B. That’s 2010% of its six month average. You know who converted $450 million of senior notes into common stock and sold at a huge profit, Silver Lake Group, only one of the world’s largest private equity shops. These are just a few of the behind the scenes players I could come up with. I couldn’t help but think of this Journey song for this week. When you look at this section of the lyrics, it makes me think of the fate of those involved in this fiasco.

Workin' hard to get my fill

Everybody wants a thrill

Payin' anything to roll the dice

Just one more time

Some will win

Some will lose

Some were born to sing the blues

Oh, the movie never ends

It goes on and on, and on, and on

This week’s post is more than just the basics of GME. I tried to take you beyond just the simple high volume trading in it, AMC and the other WSB names. Where does this stop? How does it affect the markets down the line? What really happens behind the scenes? So buckle up, there's a lot here, but much of this is NOT required now. You can take you time to get thru much of this, but scroll down quickly if you're involved with Silver at all. The spot prices are already up about 9% this morning as I wrap this up at about 7am ET.

Earnings Watch

We’re 20% thru the Russell 3000 earnings announcements. As I started going through this Earnings Season report, the amount of double takes made me just share the whole screenshot. 84% have beat on Earnings and 77% on Revenue, but the price reaction has been trash on average. Energy looks bad, but it’s mostly Baker Huges, Chevron, and Murphy, which we’ll talk about below.

• You know it was a crazy week, when Tesla earnings took a backseat. I barely heard about this at all. The missed on EPS and the stock gapped down, but rebounded a bit only to close the week lower. Odd thing here was the less than enthusiastic selling. It “only” traded 26M & 34M shares on day. It is still a little low on the notional side, the $25B avg over the last two days was about 20% below the 30 day average. Maybe the normal Tesla bulls had their focus somewhere else. Ideas?
• Murphy Oil got punished the week before earnings on President Biden’s stock drilling talk. Trading has been elevated since. It had a decent day leading into earnings, but a big miss, as we predicted, sent the stock lower on Thursday and Friday. I didn’t listen to the call, but didn’t see a single thing good about that last report or guidance.
• Olin was looking good coming into the report. They did beat estimates, but did not live up to our 33% prediction for EPS. Revenues were strong though coming in 14% higher and 19% YoY growth there. The stock opened higher and moved up as much as 8% then came back to earth to close down on the day.

For this week, we start getting to the main course. Nearly 500 of the remaining 2,200 names in the Russell 3000 are reporting. They account for roughly $10.5T in Market Cap or 25% of the index. That market cap though is mostly from Amazon and Alphabet, who both report on Tuesday.

• Exxon Mobile (XOM) is not the big shot it used to be, but it’s still a $189B company. This company has a ton of short term momentum coming into their report this week. Their last two reports have been negative from an earnings prospective, but last quarter less than expected. The stock has seen strength along with the rest of the Energy sector of late. For Tuesday’s report, only four of the 18 analysts are included in the SmartEstimate. There’s a huge expected surprise of 6 cents/share or 61.2%. Analysts expected them to return to profitability too. Looks like the options are pricing that in too.
• The WWE is showing a Predicted surprise of nearly 14% to the downside. All the newest estimates are much lower than those in the x-cluster of the SmartEstimate. There is also a bold estimate 34% to the downside from JPMorgan’s David Karnovsky. This stock has terrible momentum on the estimates as a whole, which is reflected in its ARM score of 22.
• Arrowhead Pharmaceuticals (ARWR.O) might be the most interesting of the three names here. The Predicted Surprise is -80%. The reason this one is so high is the crazy high estimate from B Riley. Their quarter comes in a whopping 1,570% above the mean at $2.78 on a basis of $0.17. I double checked their report too, which came out in late November. It’s by far the oldest estimate, because of the sporadic updates in the name it’s not excluded. This name also has the highest implied volatility and three times as many calls open as puts.

Best of the Week:

The MarketEar team has moved most of their content behind a paywall, but this one was not. It gets into some details around risk. You may think your risk is low in a situation, but this article shows that many times it takes a deeper look. This also helps you understand one of the reasons behind why some brokers, RobinHood included, stopped trading in many of the WSB stocks.

Gamestop, Robin Hood, operational risks and the "outlier" most risk managers never look at

Best of the Rest:

I’m not sure we're even close to the end of this event, but the team at MarketPysch shows the meteoric rise of GME in the news. This moving bar chart on the Buzz in news and social media of GME is phenomenal.

Marketpsych_buzz_gme

This is an excellent and quick update from the team at Goldman Sachs on some of the happenings last week. Rather than go into all the stats, you can hear many of the important ones in this episode.

Markets Update: January’s Record Inflows and Retail Trading Boom Listening time: 15 minutes

Cem Karsan and Kris Sidial join Jeff to talk about what’s happening behind the scenes at the dealers. How does the hedging on these work? Kris and Cem walk through this and they end on where this is going. They think maybe a couple of weeks or so of this then we should get back to some semblance of normalcy.

Wallstreet Bets Busts Wallstreet? WTF ^%$# - Listening time: 81 minutes

Grant and team shine the light on some of the behind the scenes issues with the attack on the short sellers.

The Grant Williams Podcast - Short Shrift - Listening time: 47 minutes

You thought the Robinhooders got the short end of the stick when it stopped buying in the meme names. How about this story shared by Nick from the Piggly Wiggly squeeze from the early 20th century. THIS is getting screwed.

When They Start to Lose, They Change the Rules!

Here are some more examples from history where the small guy thinks they've won. We must continue to learn from history otherwise we're doomed to repeat it. 

Speculation & The Underdog

This is not the first internet based protest and it will not be the last. Kevin Roose writes a thought provoking piece on why this is happening. The NY Times website also does something I love, it has the author read their story and make an audio version available on the story.

The GameStop Reckoning Was a Long Time Coming - Listening time: 8 minutes

GameStop’s stock was getting hard to purchase for the WSB crowd as a few brokers limited purchases at points. As we saw above, it’s mostly risk mitigation. Last week the S&P Retail ETF (XRT) was a bit more volatile than normal and traded a ton more volume than its average. In fact the 96 million shares was more than the last seven weeks combined. The WSB crowd seems to have found a way to get some exposure. XRT, which is rebalanced quarterly and aims for equal weight constituents, saw GME rise from 1.5% to ~20% of its constituent basket. XRT ended the week up 17.5%, but it also saw a drawdown of more than 80% of its assets. Why? While the rookies saw XRT just as a way to get upside exposure to GME, the vets took a different track. There are pros still shorting GME (58M share or $11.1B notional according to S3’s Black app), but it’s hard to find shares to borrow and it’s very expensive to do so. According to the two apps in Eikon, it was 20-30%. Well, if you need some GME just buy XRT and deliver it in 50,000 share lots to get yourself about 2,600 shares of GME (about $500K notional). Then sell off the remainder of the basket, which is a very small amount of the other names. $600 million plus of redemptions later, you have about 250,000 shares of GME. XRT now has a market cap of just $228 million. Talk about residual effects of a mania.

XRT? As a way to get GME? Discussion

On the heels of the GameStop fireworks the last 2 weeks, it's important to know that this is not isolated to stocks. This nonsense can have an effect on debt prices as well. Our resident fixed income expert here alerted me to this move in AMC bonds too. Below is a chart of AMC, one of the other Robinhood favorites, against its largest bonds 12% June 2026 '23. AMC bonds have traded over $2Bil worth since the beginning of January. The 12s have traded from a low of 21 on Dec 30 to a high of 74 on Jan 28. AMC’s revenues are estimated to drop from $5.5B in FY19 to $1.2B in FY20.

The GameStop and AMC drama doesn’t stop with the stock market

Silver Lake cashes out on AMC for $713 million after Reddit-fueled rally

Another GME also saw a little interest. The problem with this is that it’s an Australian Metals and Mining company. Some of the WSB crowd must have been up late at night drinking when they saw this.

While the effect is secondary on company credit, the WSB crowd seems to have their eyes glancing towards options in the Silver Trust ETF (SLV). See this from the Buzz coming from the MarketPsych data in Eikon. SLV was up about 5% last week, and saw nearly a billion dollars of inflow on Friday. Because of its role as a protection like Gold, Silver tends to have a slight of a call skew to it. Meaning the calls trade at a slight premium to puts, unlike in equities. The call skew ratio for SLV (middle pane in the second chart) is about 30% below average and the deep out of the money calls are 20% above average. You can see what that looks like for the Feb and March options in the first chart below. This tells me traders and maybe even the WSB crowd are buying call options to be ready for this. The options on Comex Silver futures, which there is a very low likelihood WSB crowd is trading, look nearly the same to the SLV options. The futures positioning of the non-commercial traders is a pretty healthy net long, but nothing out of the ordinary.

Reddit day traders look to silver as the next short-squeeze after being restricted from hot stocks

Excellent summary of the media storm this week, history of the rules changing, and the possibility of a Silver squeeze.

Is a WallStreetBets Silver Squeeze Possible? - Listening time: 15 minutes

Josh shares some commentary from Peter Boockvar on the chatter around Silver.

The Case for Silver

After 20 years of producing some of the best short selling research, Citron is calling it quits. Andrew posted this quick video message on Friday morning. In my opinion, this is a huge loss for the investing community. One less private detective working against corporate fraud and silly business practices.

Citron Research discontinues short selling research

This is an outstanding conversation. It might get a little technical or legal at points, but it's eye opening for those that do not understand some of the legalities of how the back end of the financial system works.

Bitcoin & The Future of Regulation - Listening time: 70 minutes

Non Gamestop/Short Selling Content

Cathie Wood is probably the most popular portfolio manager in the business right now. She joined The Investors First podcast to talk about her firm and ideas on innovation. I thought this was a good share because Cathie is in the news so much, and this really highlights the ideas around why Ark invests the way they do. There’s some talk around Ray Dalio’s principles in here too.

Disruptive Innovation w/ Cathie Wood - Listening time: 55 minutes

This link is to the Monday email from MacroOps with some of the best charts I see during the week. They come from all sorts of places, but some you’ll never see that come from restricted sell-side research. I found two I found excellent value in this week, the first one is this risk appetite indicator from Goldman Sachs. Things are looking quite rich. I don’t share these too often, but if this sort of thing interests you, I recommend signing up.

The GREATEST Market Rally of All-Time [DIRTY DOZEN]

This one is actually from the week before last. Co-Host of my favorite podcast joins ReSolve’s Friday afternoon riff session to talk proprietary trading. If you want some more insights into what’s going on with global macro, this is a good listen. If you want to hear what it’s like in this environment for a prop trader, this is a great listen. I put this DXY chart from the MacroOps post above in here, because Patrick brings up a point on this towards the end of the chat.

ReSolve Riffs with Patrick Ceresna - Making the Big Picture Work for You - Listening time: 97 minutes

The Market Ear is another daily email I get with a bunch of charts. I have no link for this, because the email is only free screenshots, when you click to the link it’s behind a paywall at Zerohedge. Anyhow, this table from JP Morgan is fascinating.

Fixed income was a huge part of the investment portfolio for a long time. In fact, it used to be illegal for some pensions to even hold equities. As rates have come in quite a bit, bonds have become less and less important from a return perspective. However, this article argues that they are still imperative to the portfolio. The article ends on an impact point, bonds have been around a while, since about 2400 BC, and they will continue to deliver.

Special Report: What Low-Paying Fixed Income Still Gives Us: Ballast

There was a lot of negativity in this week’s post, so I wanted to end with something positive. This is a nice story about adaptation, quick thinking, and doing what you can under difficult circumstances.

Healthcare Workers Stuck in a Snowy Jam Give Covid-19 Vaccine to Stranded Drivers

Thanks for reading. Now, I'm off to shovel the ton of snow that was dumped on me overnight.

Michael