The kitty roars, Vlad gets impaled, GME doesn’t stop sliding, sterling hits $1.40

Morning Note

“I’m not a cat”. If there are aliens on Mars, I think this would be a suitable gambit to commence our inter-planetary communication. Yesterday we reached a moment of meme perfection when Keith Gill, aka Roaring Kitty, aka DPV (look it up), told the House Financial Services Committee that he is no feline. He also stressed he is not an institutional investor, nor a hedge fund. The politicians were instantly on side. GameStop shares popped higher as he started talking and set out his fundamental bull thesis on GME, but by the close it ended the day down another 11% to $40. 

 

So, what have we learned from the hearing? Gill comes out of this rather well; intelligent, well-informed, a true deep value investor. But he still faces a class action lawsuit. The focus point for lawmakers’ ire was Robinhood and its rather uncomfortable-looking boss Vlad Tenev, who was forced to admit to making mistakes. A $3bn margin call sounds like Robinhood wasn’t prepared for this kind of event. Melvin Capital’s Gabe Plotkin admitted that in future you won’t see the kind of enormous short interest in single stocks like there was on GME before the squeeze. Real time settlement will one day happen, but not yet.  

 

You got a sense that the main thrust of some Representatives was: why aren’t customers entitled to a refund when they lose money on stocks? There also seems to be an inordinate amount of attention on why Robinhood blocked buy orders on some stocks like GME but not sell orders at the peak of the frenzy in January. Like, why did you stop Redditors buying at the very top and losing even more money? Even more so, you got a sense most politicians don’t understand how markets function. It’s not a retail shop. You don’t get a 14-day money back guarantee. Lawmakers focused on the payment for order flow, when this is what allows the free trading in the first place – markets don’t make themselves. There are costs. If you’re not paying for lunch, either your dining partner, or the restaurant owner, is. 

 

Grandstanding: As usual this seemed more about chastising some Wall Streeters to look good in front of voters. Maxine Waters, the Democrat chair of the committee, insisted Tenev answer ‘yes or ‘no’ to  a series of convoluted questions that required some explaining, and in the end she cut off answers because of the time rather than allowing anyone to explain themselves in full. One lawmaker raised a question about a 2004 options market filing…which had nothing to do with the current situation. Patrick McHenry, the senior Republican on the Committee, pursued a bizarre line of attack asking why Robinhood traders could not purchase stock in Robinhood, a private company. Now there may be a case for individual investors to be able to participate in private markets – albeit a shaky one since the disclosures and reporting requirements are much less rigorous than they for listed entities. But it was not in any way related to GameStop, Citadel or Reddit. There is always the risk that this will lead to some bad regulation, but it could be good. Quicker settlement times would reduce problems. Indeed, you could argue that this episode was the market working efficiently to highlight stress points like aggressive shorting practices (more than 100% of stock on loan is clearly problematic) and settlement times. 

 

Diamond hands: Gill said he’d buy the stock now at $46. But we kind of know this already – it’s never been in question that a bunch of the /wallstreetbets crowd are a) very aggressive investors and b) prepared to YOLO their savings on a single stock. That’s up to them. But it is the duty of market watchers to point out that these things tend to end one way, with most losing out.  

 

Elsewhere, Wall Street closed lower and could head for a choppy finish with options expiries today. European shares are wobbly this morning, chopping around the flatline. The FTSE 100 is just about holding on 6,600. US 10-year yields crept back above 1.3%. US initial jobless claims were worse than expected, pointing to a more sluggish recovery than retail sales numbers would indicate. New claims totalled 861,000, the highest level in a month. UK retail sales fell in January for the first time in months as the never-ending permanent lockdown started to gnaw at confidence.

 

In FX, sterling broke through an important psychological level at $1.40 for the first time since April 2018. After some likely profit taking around this region you can now see GBPUSD start to look to edge up to around 1.44-45. Partly it’s a sign of emerging confidence in the UK’s economic recovery thanks to vaccines – and the end of the Brexit cliff-edge – but also just plain old dollar weakness. Looking forward, sentiment wise a lot will depend on Boris’s unlocking plan on Monday. So far, he has stressed caution and said reopening will be gradual and conducted in stages. Schools will undoubtedly be first, pubs likely last. Pound strength will be a partial headwind to the FTSE 100 thanks to the dollar earners, but as stated previously overall I think we are back into a stronger correlation between sterling and UK equities now that the Brexit risk has been removed. We will also pay attention to the pace of vaccinations, which may already be starting to slow after the government scrambled to hit their 15m target by Feb 15th. 

 

Bitcoin: Yet more institutional support. DoubleLine Capital LP chief and long-time gold bug Jeffrey Gundlach is backing Bitcoin as the asset to insulate investors against the great monetary inflation. He tweeted: “I am a long term dollar bear and gold bull but have been neutral on both for over six months. Lots of liquid poured into a funnel creates a torrent. Bitcoin maybe The Stimulus Asset. Doesn’t look like gold is.” Prices remain supported above $51k this morning with near-term resistance marked around the $51,800 level. 

 

Gold bugs beware: gold keeps looking like it wants to break under the key support at $1,763, but holds a little above this level in early trade today.  

Gold keeps looking like it wants to break under the key support.