Master of Puppets

 

What a week! I mean just when you think things are going to slow down, we see something else crazy happen. This week GameStop (-80%) and other meme stocks came crashing back to earth. Cornering the Silver market was a total fail. The richest man in the world is stepping down from running the world’s 4th largest company to play with rocket ships. Apple is now talking about building a car. Maybe you’ll be able to drive that with your watch. There were 40+ new companies that started trading last week, 14 IPOs and 27 SPACs. Janet Yellen moved faster than the normal speed of government and called a meeting with the SEC, Federal Reserve Board, the Federal Reserve Bank of New York, and the CFTC to discuss the recent r/WSB and RobinHood trading activity. At this pace, we might have a Congressional hearing before 2022. While I don’t think anything really comes of it, besides some grandstanding out of Congress, the first think I’d like to see would be short disclosures similar to those in Europe. Why are short interest reports only releases 2x per month with a week or more delay? Another change likely to be discussed is quickening T+2 settlement. Below we'll hear from Marc Cohodes on something that would really change financial markets. Stimulus is still a big topic. Mainly, how quick and how big it will be? These people can’t agree on the color of the sky, never mind something as big as +$1T bill.

This week’s title goes back to one of my favorite Metallica songs. After getting some more info around the details regarding the r/WSB squeeze, I believe the lambs were led to slaughter by a wolf in sheep’s clothing, a pied piper, or better yet a marionette. I think someone with detailed knowledge of the way options and securities markets functions riled up the masses, who were already looking for a spark, and sent them on an unwinnable mission. Did a bunch of average traders make a ton of money? I’m sure they did, but we’re seeing reports of some hedge funds and private equity shops making profits in the hundreds of millions, while a bunch of retail traders rode the wave back down. Where are Elon and Chamath now? These two were cheering on buyers into some of these stupid trades, essentially making the noob whales think they had a chance. Now, Elon and Gene Simmons are promoting reckless trading in Dogecoin. Some of the other knock-on effects, say AMC’s debt restructuring, were not the goal of the masterminds, but they further enriched the big shops. Once again, the big boys outmaneuvered everyone. 

I’ll be watching a few things outside of earnings this week. Paypal investor day on Thursday. Listening for what comes out of the Cowen Aerospace/Defense and Industrials Conference. The Refinitv events team will be busy with the transcripts coming out of this. Dating app Bumble is expected to start trading this week with a value over $1B. CME is launching futures for Ethereum.

Earnings Watch (using IBES & Starmine Estimate data from Refinitiv)

It was another huge week of earnings reports. Here are some notable highlights.

The good:

• IAC reported $5.59 vs. -$0.67 expected
• Ford Motor $0.34 vs. -$0.07
• Amazon sales topped $100B in Q4
• UPS Revenues $24.9B = growth of 21% YoY, Amazon was 13% FY revenues

The bad:

• GrubHub -$0.041 vs. $0.05
• Harley-Davidson -$0.63 vs. $0.14
• BP Q4 $0.04 vs. $0.085, first FY loss since 1993

• Exxon Mobil had a nice upside surprise on the bottom line this quarter. It was not all great though, as they missed on the top line. While they did swing a small gain, the company was not able to overcome their terrible Q2&Q3 numbers and posted a loss for the full year, which was its first since 1999. After the report, the stock traded higher each day this week. Friday the stock gapped higher and the only real news I can see was adding ESG investor Jeff Ubben to its board. Maybe investors are expecting a possible improvement in its ability to garner ESG assets, the firm’s current Refinitiv ESG score is a C, but oddly enough that’s on terrible Governance and Controversies scores. 

• The WWE stock took a steel chair to the head this week. Investors were expecting a rough quarter, but they came in much worse than expected. Revenues were down 26% YoY and the business has been tremendously impacted by COVID. Live events and venue merchandise accounted for $144M or 15% of their FY19 revenue and that was essentially gone in 2020 and not expected to see any life until at least H2 of 2021. Vince McMahon and his family are fantastic leadership, and have found ways to source revenue from their millions of fans. I don’t understand this overreaction to what seems to be a known event.

• Arrowhead was a bit odd. They company missed huge on the top line and the EPS missed big as well reporting a $0.20 when a gain of $0.11 was expected. The stock opened lower on strong volume, traded down as much as 6.4%, but actually ended the day up quite nicely. The company didn’t provide any new guidance, but there were five price target increases. Reading through some of the reports, it seems they offered some clarity on their pipeline. Buyers seemed to like those notes that came about, especially the midday report from B Riley. The stock rose 4.7% after their 1:30ET report.

This week

Nearly 500 companies are due to report this week. Disney, Cisco, Uber, rivals Pepsi and Coke just to name a few of the widely followed. I’m personally looking forward to hearing from GM, CME Group, and Zillow. GM’s EV plans of interest and Zillow and CME volumes. There are also more than 30 REITs reporting, which should give us some insight into how residential and commercial real estate is holding up.

• Fox Corp has some exceptional momentum behind its high Predicted Surprise of 85%. The expectations here comes from 13 of 23 analysts updating since late January, while the other 10 have not updated since early November. Those older estimates are all much lower, average -$0.16, with Morgan Stanley’s five-star analyst being excluded because of an estimate that’s 186 days old. The “A” shares trade 3x the volume of the standard FOX security. The options on this name are a little elevated. While the company has beaten expectations on all seven of their reports since the Disney deal, the stock has had mixed reactions.

• I picked Tenet Healthcare this week because of the three Bold estimates. Two are more than 130% above the mean and one is 68% below it. The two positive Bold numbers come from UBS’s Whit Mayo and Raymond James’ John Ransom. They are joined by Barclays and Jefferies two-star analysts with very high expectations. Removing those four and the rest average about $0.95 vs. the mean of $1.70 and a SmartEstimate of $1.88. Credit Suisse’s AJ Ric is the downside Bold estimate down at $0.53. He also has some company down there. The options are very high on an IV basis and when looking at very historical vol. The stock has had mixed performance, but the stock does move an average of 8% after reporting. Seven of the last twenty reports have seen moves of more than 10% in either direction, so while volatility is priced very high, it’s not outrageous.

• Red Rock Resorts is a little different than the other two names. For one, it has a Predicted Surprise to the negative side, but it’s also a recovery trade name. These names have seen some increased volatility of late with money trying to beat any good news. The details of the estimates also standout. Of the ten analysts covering the stock, only three are included in the SmartEstimate, but there are three excluded that are truly keeping the mean higher. Two of those are more than 100 days old, so effectively before the last earnings report. Those three average $0.46 vs. a mean of $0.30. I can’t see this company beating the last quarter, but that doesn’t mean it cannot move higher. Q1 of 2020 and Q4 of 2019 were both on the wrong side of expectations and the stock ended the day higher. Any positive outlook, could send traders rushing into this name trying to play the re-opening.

Best of the Week:

Famed short seller, Marc Cohodes, talks with Jason Buck of the Mutiny Fund on Real Vision. Marc gets really fired up during this chat. Don’t listen to this with kids in the room. My favorite view of Marc’s is when he talks about the big risk takers paying insurance on their portfolios to cover a possible too big to fail situation. Reckless use of leverage should be limited by regulators if the public’s money is going to be used to rescue these firms.

Marc Cohodes: “The Stock Market is Not A Game” - Listening time: 65 minutes

Best of the Rest:

Pretty strong opening statement from Stan here. He provides a good amount of commentary here in 20 minutes. The key points are the deficit, inflation, Asia’s future, VaR is trash, Bitcoin is both a bubble and a sign, and questions on the future of capitalism.

"Buckle Up!" Stan Druckenmiller talks at GS - Watch time: 20 minutes

A quick summary of the 1923 book, it highlights the mistakes made by people that speculate. 

The Facts about Speculation by Thomas Gibson

This is not about what you think it is. Ben is taking it to the next level here. He’s referring to things like lower costs, index funds, and alternative investments like Crypto.

How The “Dumb” Money Won

Special situations are a true place to find value. This is one of those styles that is a hybrid between trading and investing. Sometimes you can capitalize quickly and sometimes it takes years to realize the true value. David joined Meb to talk about this for European markets.

Best Idea Show - David Marcus, Evermore Global Advisors - Do You Sell Things That You Like To Buy Things That You Now Love? - Listening time: 73 minutes

Citadel continues to be in the news. Last week they were linked to Robinhood’s sudden halt of trading in the meme names. This article is about Citadel going on the offensive against IEX and a new trading method they released in October. Citadel is trying to overturn the SEC approval of this order type, but there was a long comment period on this last year and it was supported by a number of large buyside asset managers. This suit adds to the ever changing microstructure battle for order flow. IEX was the focus of Michael Lewis’ FlashBoys and now they continue to try to combat the high frequency market makers.

High-speed trading firm linked to Robinhood is going to war with the SEC

IEX- Discretionary Limit Order Type

More often than not insiders are a good indicator of what’s happening with a company. Much of the narrative is that buying is buying, but selling can mean anything. However, when you see this much selling, it might be a signal.

Opinion: Insider selling is alarmingly high and small-cap stocks are in the crosshairs

Between margin debt, options, and penny stock volume, retail traders are looking to take big risks to make it rich. I had two people in my life that are in completely different circles call/text me on Enzolytics Inc (ENZC). It’s a pink sheet biotech, that was trading less than $0.10/share and is now up to $0.52. Both have the extra cash, so it doesn’t matter, but it’s just an example of chatter around lottery ticket type stocks. Very similar to the sort of calls/emails I was getting when I first got into the industry in late 1999. These next three links and charts show just some of the indicators around this sort of activity.

The ‘Index Of The Volume Of Speculation’ Blows Off

A clear sign of an options mania

Trading more than $72 billion in penny stocks.

The main part of this podcast is Dan talking with Market Wizard, Chris Camillo. Chris was one of the traders featured in Jack Schwager’s newest book. He trades using social arbitrage and as you can read in the headline, turned $20k into $2M in roughly three years. Chris reviews his process with Dan and some of the tools he uses to get into trends right at their start. Dan opens his episode with commentary around GME and a few other things, but if you want to get right to the interview, it starts about 9 minutes in and lasts about 55 minutes. If you're interested in using sentiment analysis in your trading or investing, Refinitiv partners with MarketPsych to offer News and Social media sentiment data on 12,000 companies as well as commodities and currencies.

Turning $20K to $2 million During the Financial Crisis - Listening time: 82 minutes

Capital Group puts out excellent reports, and their 2021 outlook is no different. In this sixteen page presentation, you can gain value from reading the summary page or go into the details they provide on their opportunities this year in Equities and Fixed income. My favorite slide was on the opportunities in Health care. Their forecasts for telemedicine growth are astounding.

Long-term perspective on markets and economies

This was an informative conversation with Eric Felder, CEO of Moelis AM, and James Palmisciano, of Gracie AM (wholly owned sub of Moelis) on preferred stocks. Low yields, 80% of bonds in the world yield less than 2%, make the US markets look appealing. The Preferred market is roughly the same size as High Yield, but offers less risk and relatively similar good returns.

Eric Felder & James Palmisciano - Listening time: 31 minutes

A16Z covers the history of CEO transition and how this might relate to what Amazon will have to go through with the Jeff Bezos announcement last week. Bezos has built a behemoth. Amazon's online store alone would have the 21st largest revenues in the world, then add 3rd party sales which would be 94th and AWS 215th. 

Beyond Bezos: Amazon, Cloud, and CEO Transitions - Listening time: 16 minutes

Chinese New Year is Friday, so bring on the Year of the Ox and if you haven’t ordered something for Valentine’s Day, it’s Sunday (you’re welcome!).

Have a great week and thanks for reading.

Michael