GameStop earnings look ahead

Equities
Investments

Meme stock favourite GameStop (GME) is set to report Q2 results after the market closes on Wednesday, September 8th. The stock, which was at the heart of the Reddit trading frenzy in January, is up more than 1,000% YTD and closed Tuesday’s session at $199, a loss of $3.45, or 1.7%, on the day.

Flush with the proceeds of a recent equity raising, the company has been tackling debt and seen encouraging sales progress, with growth across hardware, accessories and collectibles categories.

What should investors expect from GameStop earnings?

Markets expect losses to halve, with the company seen reporting a loss of $0.70 per share vs $1.40 per share seen in the same period a year ago. Revenues are expected to rise 20% year-on-year to  $1.1 billion.

In June the company said it would continue to suspend guidance for 2021 due to the pandemic, but said net sales were the best metric to follow. “The company’s second-quarter sales trends continue to reflect momentum, with May total sales increasing approximately 27% compared to last year,” the company stated.

Ultimately though the stock remains disconnected from fundamentals so the price action is more about expectations for the turnaround strategy. Given its propensity for volatility, traders should be willing to expect noisy price action around the results.

On the chart, we can see that after a run lower through June and July the subsequent rally has stalled and there is a clear loss of momentum to the upside. Bulls looking to break $230 to be encouraged at a return to March and June swing highs around the $340-350 level.

Chart showing GameStop price action on 08.09.2021.

Afternoon wrap: Shell loses emissions court case, Amazon inks MGM deal

Commodities
Equities
Investments

A bit of a dreich day for European equity markets with nothing moving much at all. All the main bourses have traded flat. US markets are mildly higher as Wall Street’s bank chiefs testify in front of Congress. Oil recovered $66 as inventory data showed a bigger-than-expected draw in inventories as well as stocks of gasoline and distillates. US 10s at 1.55%, gold above $1,900 and Bitcoin is weaker in the afternoon session below $39k again.

The dollar caught a big bid into the London fix. Dovish comments from the ECB’s Panetta – too early to taper bond purchases – had already set the EUR on a downwards trajectory through the session. EURUSD retreated to 1.2210 where it seems to have found some support. GBPUSD has tried several times to breach 1.4120 on the downside today but the level is holding well. The dollar index had a run up to 90 but ran out of steam at 89.95.

Doubling Dutch emissions cuts: A court in the Netherlands has ruled Royal Dutch Shell must cut carbon emissions by more than twice the company’s current target of 20% by 2030. The Dutch ruling compels Shell to reduce emissions by 45% from 2019 levels by 2030. Currently, Shell has a goal of achieving this 45% target five years later in 2035, and to be net neutral by 2050.

Shares had been trading a little higher all day before the ruling saw them turn mildly negative, before turning back above the flatline towards the end of the session. Shell says it will appeal the ruling. It comes as Chevron and Exxon also face their own climate campaign fight in AGMs today. What does the ruling mean for Shell and peers?

It undoubtedly sets an important precedent that ties corporate actions to global and national policy in a way that has not been seen before. It’s acknowledgment that you cannot abstract the likes of Shell and other ‘polluters’ if you like from the legally-binding treaties and obligations nation states have signed up to. Similar judgments may start to emerge that compel polluters to better align their strategy with government policy (eg the Paris treaty). It could also have implications for other sectors (eg Utilities) though that is less clear right now.

It is not yet clear to what extent this really changes whether you want to own Shell stock right now. True it could face fines if it doesn’t meet the targets, rather than just shareholder disapprobation. It may also need to increase the near-term capex for ‘greening’. But really this is speeding up a process already in motion. Indeed, the recent investor vote on setting more ambitious carbon reduction targets highlighted the extent to which investors are fully behind Shell doing more, quicker, not less, slower. Which kind of says most investors will be comfortable with the ruling, in of itself. Worries about higher capex and lower returns are another matter. The quicker Shell moves on this, the sooner fund managers with ESG-criteria to box tick will take a kinder view to the stock. Shell will have to act on this, and it could speed up divestments and potential deal activity if it is looking to use its current scale to swallow up some green energy assets.

Ford shares rallied 7% as it announced a $30bn investment in electric vehicles through to 2025. Investors lapped up the ambition. The company says it expects 40% of its sales globally to be EVs by 2030. It’s the first investor day under new CEO Jim Farley and there seems to be a real buzz about Ford’s EV plans now – watch out Tesla.

Amazon shares were mildly higher as the company confirmed it is acquiring MGM for $8.45bn. Like just about any big Amazon deal, on the face of things this looks like bad news for competitors, all else being equal. It gives Amazon significantly more firepower in terms of its Prime streaming platform. The impressive catalogue from MGM (James Bond etc) will help Amazon drive further up-selling of content in the Prime mix. Owning MGM also allows Amazon to benefit from having more control in the content output from the studio, which puts more squarely in a straight fight for eyeballs with Netflix/Disney. Of course, we cannot like-for-like Netflix subs with Prime membership, but, on the margins, it could make Prime compete more fully for eyeball time, which a) makes it stickier with users and b) reduces consumer propensity to have another streaming service.

Netflix tracked the move in Amazon shares but this could be more about the broad 0.55% rally for NDX today. Disney shares rose 1%. Comcast rallied 3% as it’s not seen in a rush to do any further deals. We are seeing significant consolidation in the streaming space that acknowledges the requirement for scale in order to survive – only last week AT&T spun off Warner Media to merge with Discovery. A major deal but hardly transformational for Amazon.

Finally, meme stocks are back – GameStop shares rose 14% and are now up 35% on the week. AMC added another 12%. Both jumped yesterday as Redditors on /wallstreetbets renew their interest in their old favourites.

Tesla questions remain, BP and HSBC profits leap, GME roars higher on equity offering

Morning Note

Record highs for the S&P 500 and Nasdaq yesterday failed to really kick start the European session this morning with the major bourses all looking a bit sloppy in the face of a raft of big corporate earnings announcements. We’re into the meat of earnings season proper now with 173 S&P 500 companies that account for around half the market capitalisation are reporting this week. So far so good: of those that have already reported, revenues are up 10% on average, while earnings are up by a third. A stunning turnaround from last year’s pandemic washout, driven by a combination of massive fiscal stimulus, extraordinarily accommodative monetary policy and a vaccine-led cyclical bounce back of epic proportions.

Tesla posted better-than-expected earnings in the first quarter. The company posted GAAP net income of $438m with earnings per share coming in at $0.93 on $10.39 billion in revenue, up 74% from a year ago. Some $518m in regulatory credits helped, whilst it added $101m to its bottom line from the sale of Bitcoin after its $1.5bn ‘investment’ announced in February. Is this an automaker or not? I have been very sceptical about this Bitcoin position and what it exposes the company to. Shares slipped more than 2% in after-hours trade following the results. Still, it was a record quarter for sales and progress is being made on the delayed new models with the new Model S landing on customers’ driveways by May 2021 and Model X deliveries to commence in Q3. Tesla also pointed to Model Y production ramps at Fremont and Shanghai going well. Meanwhile buildout of Berlin ‘Gigafactory’ is continuing to move forward, with production and deliveries remaining on track for late 2021, Tesla said. Chip shortages are a problem, but Tesla suggests it’s finding ways around. And although margins did pic up, there are maybe some questions over margins with the lower average selling prices – excluding regulatory credits the margins in the core auto business were 22%. I don’t think these results really tell us an awful lot more than we already know about Tesla.

BP profits jumped to $2.6bn, easily beating analyst expectations and well ahead of last year. Looney says the company is in good shape. As he puts it, these results really put to rest some of the fears investors may have had around this stock as it’s managed to reduce net debt ahead of schedule and is delivering shareholder returns. Looney seems really committed to pushing the dividend, which I suppose you can do if you are not doing any more oil and gas exploration. Still, he better keep some back for those wind turbines. BP is confident that China and the US will drive the recovery in crude demand.

The reduction in net debt is eye-catching, with the figure down around $18bn in the last year from $51.4bn to $33.3bn, meeting the objective a year early. Reported profit for the quarter was $4.7bn, compared with $1.4bn profit in Q4 2020 and a loss of more than $4.3bn a year before. Underlying replacement cost profit came in at $2.6bn, compared with $0.1bn for the previous quarter. BP said this was driven by an exceptional gas marketing and trading performance, significantly higher oil prices and higher refining margins. Dividend of 5.25 cents per share declared and shares rose more than 2% in early trade in London.

HSBC profits rose 79% from a year ago on a mixture of improving economic conditions and a reduction in provisions for bad loans. Among other things, the company noted solid growth in Hong Kong and UK mortgages. Interestingly for a bank that has been seen to put all its eggs in one Asian basket as other regions have been less profitable, all regions were profitable in Q1 and notably the UK bank reported pre-tax profits of over $1bn in the quarter. Reported profit after tax was up 82% to $4.6bn, while reported profit before tax rose 79% to $5.8bn. The bank said that reduced revenues, which fell 5% $13bn, continued to reflect low-interest rates. Provisions for bad loans were less than expected, particularly in the UK, mainly reflecting a better economic outlook and government support schemes. As such reported provisions for bad loans was a net release of $0.4bn, compared with a $3.0bn charge a year ago. Shares rose a touch in early trade.

Sticking with banks – UBS this morning admitted it took a $774m hit from the Archegos fiasco. This is not as large as the $5.5bn for Credit Suisse, but nevertheless shows how the fallout was wider than initially thought. Despite this, profits at UBS rose 14% to $1.8bn. Wealth management profits rose 16%, whilst investment banking was down 42%. UBS, which has fallen 2% this morning on the update, says it has now unwound all its exposure to Archegos. Nomura meanwhile says it is 97% out and has taken a $2.3bn loss on its Archegos exposure, adding that it expects to book about $570m more in charges related to Archegos this financial year.

Shares in GameStop rallied almost 12% and added a further 9% in after-hours trade to hit $184.50 after the company completed its at-the-market equity offering. In an update to investors yesterday, management said they had sold 3.5m shares of common stock and generated aggregate gross proceeds before commissions and offering expenses of approximately $551m, Roughly, that means they got this offering off at about $157 per share. Net proceeds will be used to continue accelerating GameStop’s transformation as well as for general corporate purposes and further strengthening the company’s balance sheet.

As I previously argued, shareholders who have been bidding up the stock should be pleased by the offering. Although it entrails a meaty dilution, the cash call is entirely expected and without a big capital raise now that takes advantage of rally in the stock, Chewy.com founder Cohen might not have the cash to fulfil the ambition of becoming the Amazon of Gaming.

Elsewhere, oil prices trade higher with WTI back above $62 as OPEC’s technical committee stuck to an optimistic view of demand growth whilst also cautioning about the rise of the coronavirus in India, the world’s number three importer of crude. The technical committee, which met ahead of Wednesday’s meeting, indicated that demand growth is still seen around 6m bpd in 2021, whilst the stock surplus should be eliminated by the end of the second quarter. There are also concerns about Japan, the fourth largest importer of oil. Copper prices continue to advance, hitting a fresh 10-year high this morning, whilst US 10-year yields pulled back from 1.6% yesterday in a choppy session ahead of this week’s Fed meeting.

FOMC preview: Wait and see mode

The Federal Reserve kicks off its two-meeting today. This week’s meeting of the Federal Open Market Committee (FOMC) ought to pass off without too much fanfare or market noise. Even as the economic indicators improve, the Federal Reserve remains in emergency mode. The Fed should be thinking about thinking about tapering, but it likely will not want to signal this just yet. It remains the case, it should be noted, that the Fed is now in a reactive policy stance where it is waiting for the data to hit certain thresholds rather than acting pre-emptively. We also know that not only is the Fed happy to let inflation get hot, but it is also focused squarely not just on employment but the ‘right’ people getting jobs. It’s a central bank that is taking a political angle to its policy making. In any event, tapering of the Fed’s $120bn-a-month asset purchase programme will be signalled well in advance, and this is not the time to do it.

Bond yields have cooled somewhat since the March meeting, with the 10-year note chopping around in a 1.55%-1.60%. In any event, if the rise in nominal yields was not a worry then, it’s certainly not one now. Fed speakers including chairman Powell have made it clear they think rates will move up because of the screaming cyclical bounce, not because people are worried about inflation.

Meanwhile, since the March meeting the pace of vaccinations has meant over half of all adults in the US have had at least one vaccination. Jobless claims have hit the lowest since the pandemic struck more than a year before and retail sales are powering head. The IHS Markit composite PMI hit a record high in April as all corners of the economy picked up steam. Despite this the Fed will remain cautious with regards to the outlook, citing the risk of fresh infections. Chairman Powell will need to acknowledge the economic recovery in progress but seek to tamp down expectations. And despite the strong demand impulse combining with weak supply to put upwards pressure on prices, he will stick to the line that any inflation will be temporary.

Tobacco stocks fall, Netflix earnings on tap, Cable touches 1.40

Week Ahead

A soft start to Tuesday’s session after stocks in Europe closed lower yesterday as the early promise of the green boards fizzled. Stocks on Wall Street were lower, with the Dow Jones closing more than 100 points below Friday’s record high and the S&P 500 down 0.5% from its all-time high also set at the end of last week. These are not strong directional moves but there is not a lot of dry powder on the side lines in investors pretty well all-in on stocks. The macro story seems well understood for now vis-à-vis vaccines, the pandemic, the Fed, stimulus – really the question mark is over whether earnings can keep up with expectations to support current valuations. In the current setup it’s hard to see room for multiple expansion – compression is way more likely as rates rise (although this trade has taken a breather for now) – so we need the ‘E’ bit of the PE bit to hold up or we will see losses. Given the reopening this year, a large global savings glut and all the fiscal and monetary largesse, earnings should be strong. But expectations are already pretty high. Where there does seem room for manoeuvre is in the rotation out of growth and into value and back again.  

 

Netflix earnings today will provide a vital guide to this. The Street expects about 6m net subscriber adds and the market should look beyond the guidance for Q2 since it’s skewed by comps. Content remains king – Netflix needs to continue to produce the goods to remain the number one – primus inter pares – streaming app among households (the last to be ditched if cloth needs to be cut). Long term it remains a structural winner and the accelerated gains from the pandemic should be now be discounted. Focus should be on churn rates, password sharing crackdown, the content pipeline and competition.

 

Shares in GameStop rose 6% after news the CEO George Sherman would step down by the end of July. This is all playing into the hope and expectation that Ryan Cohen will lead a resurgence in the firm’s fortunes on a wave of ecommerce growth. There have already been several big board moves and this is the latest sign that the activist investor is making his presence felt. Meanwhile famed Redditor Roaring Kitty – aka Keith Gill (‘I’m not a cat’) has doubled his stake GME by exercising 500 $12 call options and purchasing an additional 50,000 shares. 

 

Following moves in stocks like Altria and Philip Morris in the US yesterday, shares in British American Tobacco and Imperial Brands tumbled after reports the Biden administration is looking to cap nicotine levels in cigarettes. Officials are also looking at whether they will pursue a ban on menthol cigarettes, and whether this ought to be pursued together or separately, according to the Wall Street Journal. I remember a similar report back in 2017 on a proposal from the FDA to lower nicotine levels sending tobacco stocks plunging. Would it really make as big a difference as the share price moves suggest? Lower nicotine cigarettes may be less addictive – so the rationale is that this would make it easier for smokers to quit or switch to other ‘safer’ products and therefore be a ‘good thing’. However, consumers may be tended to perceive lower nicotine cigarettes as safer, which could make them easier to sell, which would be the precise opposite of what the administration intends. A ban on menthol cigarettes is a much more straightforward policy. Both BATS and IMB fell 5-6% in early trade on the developments.

 

Despite resuming its dividend, AB Foods shares slipped as it offered a very cautious outlook on slower reopening of Primark sites, higher costs at the food business and FX headwinds. Following an ‘exceptional’ performance in the first half of the year, management expect Grocery, Sugar, Agriculture and Ingredients businesses to be softer in the second half. At Primark, ABF expects to be trading from 68% of its retail selling space, (or 79% if stores with restricted trading are included) by the end of April. Reopening dates for France, Ireland and the remaining stores in Germany are yet to be confirmed. 

 

The real action yesterday was in FX as the dollar continued to unwind its recent gains. Sterling rallied for a sixth day on the bounce, its strongest daily move since January, and is holding onto gains this morning, with GBPUSD touching 1.40 in early trade. The move is very extended and susceptible to a pullback before the next leg back to the recent highs at 1.42. The weaker dollar extended to the EURUSD pair, which is flirting with the 100-day simple moving average at 1.2050. A sustained breach to the upside calls for a return to the 1.22 handle. 

 

On the sterling story, there are clear signs the UK is getting back to business. Normality, no; but activity is picking up. Hiring is up 17%, unemployment is down from last quarter. Retail footfall and consumer spending is picking up rapidly. Of course, all this data is massively skewed by interventions – furlough masks the true employment situation, arbitrary reopening dates skew spending to the first few days and weeks as the pent-up demand is let out. Nevertheless, these are encouraging signs. 

 

Oil is drifting higher as markets look to dwindling global inventories and the expected uplift in demand as US driving season comes into view. The success of the vaccination programme in the US is a big plus for the world’s largest consumer. Refinery runs are picking up and stockpiles globally are at their 5-year average. It’s looking like the glut developed last year is over. Reports yesterday pointed to OPEC+ downgrading the April 28th scheduled ministerial meeting to just a JMMC monitoring meeting. Given OPEC+ has already agreed production levels through to July this would make sense as the market remains fairly calm and well supported for now. 

 

As flagged in yesterday’s note, gold pulled back a touch, hit by rising Treasury yields. The 50-day SMA at $1,750 may offer an area to rest should the move in yields gather steam. The softer dollar is a support but yields matter more for gold.

Gold pulled back a touch, hit by rising Treasury yields.

Stocks look to rally but eyes on yields again

Morning Note

The change in tone from the White House in the last 65 days has been striking. Joe Biden held his first press conference as President yesterday and the atmosphere could not have been more different to Trump’s combative ‘you’re fake news’ and ‘you’re fake news’ pressers. The 78-year-old lacked energy but appeared relaxed; the press was respectful, happy to give him the benefit of the doubt. Mr Biden said he would run in 2024 – aged 82 – and committed to 200m vaccinations in 100 days. He wasn’t asked about the coronavirus – perhaps the one thing he most wanted to talk about since the programme of vaccinations is going so well. Across the pond things are not going so well. EU leaders failed to agree on a way to deliver extra vaccines to member states in the most need. Austria won’t back a deal that excludes them.  

 

Equity indices are on the front foot this morning after a directionless, choppy merry-go-round of a week. The major bourses edged up by around 0.5-1% in early trade, with the FTSE 100 recovering the 6,700 area and the DAX north of 14,750. The bounce comes after shares on Wall Street staged a late rally yesterday that snapped a two-day losing streak. The S&P 500 closed up 0.5% at 3,909, erasing a 0.9% intraday loss at one point. The Dow Jones Industrial Average rose 200 points, having at one stage been down almost 350pts. US futures indicate Wall Street will open higher.

 

The Suez Canal remains blocked and it could take weeks to sort out. A high tide this weekend may dislodge it sooner but no one seems to know for sure how long it could last. Shipping companies are starting to reroute LNG around the Cape of Good Hope. Caterpillar said it is facing shipment delays and may airlift parts. It’s reportedly costing $400m an hour in delays. WTI crude retested the week’s lows around the $57.30 region yesterday afternoon before rallying to $60.  

 

The US jobs market continues to show signs of strength: initial unemployment claims fell to 684,000 last week, the lowest since the start of the crisis a year ago. Nonfarm payrolls next Friday ought to show another handsome rise in new jobs in March similar to the +379K print last time. UK retail sales bounced back in February, rising 2.1%. Online rose to make up a record 36.1% of all sales but overall retail sales were down 3.7% from a year ago.  

 

Today we have US personal income (seen –7.3%), personal spending (-0.8%), PCE inflation, the Fed’s preferred gauge, (core deflator seen at 0.1%), the Michigan Consumer Sentiment survey (+83.6%) and the Bank of England’s Saunders gives a speech on “Supply and demand during and after the pandemic”. 

 

Watch yields again after another weak 7-year auction in the US. The yield on the 10-year Treasury is back above 1.66% following the auction, which again showed soft demand for the 7-year paper. The auction of $62 billion in 7-year notes took a yield of 1.3%, more than 10 basis points above February’s soft auction, whilst the bid-to-cover of 2.23 was also low.  

 

Funds and games 

 

Deliveroo has hit an ESG wall: the company lost another potential investor as L&G joined Aberdeen Standard, Aviva and M&G in saying it will not take part in the IPO next week. Funds are worried about things like the dual class share structure as well as workers’ rights, not to mention the path to profitability. It seems to be very good at delivering food and very good at burning cash. Institutional support is not necessary to get this IPO off very nicely for Shu and Amazon, but I would be questioning the sustainability of the kind of valuations an £8bn+ market cap implies. 

 

GameStop shares rallied over 50% on Thursday after their 30% decline post-earnings earlier this week. For this we can thank/blame Jefferies analysts Stephanie Wissink and Anna Glaessgen, who raised their price target on the stock to $175 a share from $15, hailing the company’s push towards online sales. “Our thesis is simply that rebalancing sales away from video game software/hardware will deliver superior gross margins,” they say, adding that “if the company “successfully sheds its retail heritage” and morphs into a digital commerce powerhouse its valuation could rival other purely online businesses. Meanwhile Wedbush raised its PT to $29 from $16 and Telsey Advisory cut its from $33 to $30. Quite where these numbers come from, I have no idea. Who needs a Monte Carlo valuation…? 

 

Talking of which…Cathie Wood’s space-focused ETF could launch as early as next week, Bloomberg reported. It comes as Wood’s own star shines a little less brightly after the flagship Innovation ETF fell by almost 30% in the last month. The ARKX fund will invest across four areas: Orbital aerospace companies that launch, make, service, or operate platforms in orbital space, which include things such as satellites and launch vehicles; Suborbital aerospace companies are similar, but not as high in the sky, and might include drones, air taxis and electric aviation vehicles; Enabling technologies companies are those that create the kit for aerospace operations, including artificial intelligence, robotics, 3D printing, materials and energy storage; Aerospace beneficiary companies are defined as those that stand to benefit from general aerospace activities, a diverse group that includes agriculture, internet access, global positioning systems (GPS), construction and imaging. Space is clearly going to be one of the most important areas for investors in the coming decade, with exposure to a broad range of technology players in this arena offering good optionality on the future of space travel and the commercial returns that it should deliver. 

US agency questions AstraZeneca vaccine, GameStop earnings on tap

Morning Note

You could be forgiven if you suffer value fatigue; it can be a long slog, all this ‘vaccine optimism’ and ‘reopening hopes’, for the beleaguered value investor. You’d also be forgiven for Covid fatigue; I think we have all done more than our bit to ‘protect the NHS’ over the last 12 months. And on this sorry topic there’s another headache this morning for AstraZeneca bosses as a US health agency questioned the Oxford vaccine with the ink barely dry on the company’s press release announcing the very high safety and efficacy of the jab in long-awaited US phase 3 trials. Shares fell 1% in early trade.

The National Institute of Allergy and Infectious Diseases (NIAID) said late Monday it was notified about concerns about initial data from the trials. The Data and Safety Monitoring Board (DSMB) ‘expressed concern that AstraZeneca may have included outdated information from that trial, which may have provided an incomplete view of the efficacy data’. I may have left the toilet seat up, I may not have. It didn’t say much else, except urging AstraZeneca to work with the DSMB to ‘review the efficacy data and ensure the most accurate, up-to-date efficacy data be made public as quickly as possible’. More doubts won’t do the vaccine any favour – another PR problem that will cost lives. This will not do any favours for getting this shot into people’s arms – it’s not just the rollout by government, it’s people’s willingness to get it. And on that note Europe sits on large stockpiles of the Astra vaccine as countries cannot get the jab into arms.

European shares are lower this morning after a muted Asian session with the major bourses off about half a percent in the opening minutes. Travel & leisure stocks were near the bottom of the Stoxx 600 as the UK extended a foreign holiday ban until the end of June. IAG, TUI and Carnival fell about 3-4%. WH Smith – dependent on travel earnings more than the high street these days – also declined more than 3%. US markets closed higher on Monday, led by the Nasdaq gaining 1.2% and the S&P 500 up 0.7%. Futures point to a weaker open later. Powell and Yellen are in front of the House Financial Services Committee to talk about stimulus. FOMC member Lael Brainard also talks later today.

MOAR: Joe Biden’s team is looking a $3 trillion plan for the US economy that will feature massive investment in infrastructure, green energy and education, as well as tax hikes. This fits in with his manifesto pledge, but I thought he may have taken longer to get to this point given the $1.9tn stimulus package for Covid relief has just been launched. This package would be another enormous injection of stimulus to the economy.

Tesla rose 2%, but at one point traded about 10% higher, after a bullish report from ARK Invest. Tesla is a 10% holding in the Innovation ETF (ARKK). ARK says Tesla will reach $3000 by 2025. That is not even the bull cash ($4,000), whilst the ‘bear’ case implies a mere doubling or more to $1,500. ARK uses a Monte Carlo simulation to get there, which is aptly named since it is basically a case of spinning the wheel and see what number you land on. Actually it’s more like keep spinning until you get the number you want. Investing should not be a game of roulette. You can read the full report here. If you like this I have a bridge to sell you.

GameStop reports earnings tonight. Analysts expect revenues to rise 2% year-on-year to $2.2bn, with earnings per share seen up 15% at $1.46. Dry earnings figures don’t really do it justice; these are the first earnings since the Reddit-inspired trading frenzy sent the stock skywards, sank Melvin Capital, put RobinHood in the dock and made Roaring Kitty famous well beyond the /wallstreetbets crowd. No one really cares about these earnings; they do care about what resource will be required for turning GameStop into the ‘Amazon of gaming’ – the more the board seeks to raise the better in many ways. Traders will be wanting to hear about any plans for capital raising, and more about the new ecommerce strategy.

Meanwhile, the FT reports WeWork announced losses of $3.2bn last year as it pitched for a SPAC listing and $1bn investment. Get this though: WeWork’s losses narrowed from $3.5bn burnt in 2019 because it slashed capex to the bone because of the pandemic. Investors who might have got swept up in a WeWork IPO in 2019 will be grateful the listing got pulled. Now SPACs mean it’s even easier to go public and I’m sure they will find some willing backers for this serviced office provider tech platform. Barge pole springs to mind.

Bitcoin is lower, testing the bottom of the recent range around the 23.6% retracement level after Federal Reserve chair Jay Powell warned that the asset is not a good store of value. “They’re highly volatile and therefore not really useful stores of value and they’re not backed by anything,” Powell said at a digital banking panel. “It’s more a speculative asset that’s essentially a substitute for gold rather than for the dollar.” ‘More a substitute for gold’ supports a certain bullish thesis we’ve been noting for some time, albeit the only reason you own Bitcoin is in the hope it will rise in value.

Bitcoin is lower, testing the bottom of the recent range.

Gold is trading sideways as yields are not doing an awful lot so far this week.

Gold is trading sideways as yields are not doing an awful lot so far this week.

European shares tread water after Dow hits record

Morning Note
  • Dow record high
  • US House passes $1.9tn stimulus package

Stocks in London, Paris and Frankfurt opened tentatively higher after fresh records on Wall Street and a decent handover from Asia. The Dow Jones rose 464.28 points, or 1.5%, to notch a new record closing high at 32,297.02, after House Democrats passed Joe Biden’s $1.9bn Covid relief package. Stimulus cheques are coming and there is a realisation that a lot of this cash will go straight into stocks, as well as being spent on goods and things that drive company earnings. Relative calm in bond markets is helping to boost sentiment in stocks – US futures are trading higher. Gains in Europe were a little muted however as trading progressed in the first half hour, perhaps on some caution ahead of the European Central Bank (ECB) meeting later today.

Yesterday’s 10-year Treasury auction was a little soft but not enough to really worry the market. There was enough demand to let the yield on the US 10-year retreat a little.  10s are back under 1.5%, the lowest since March 4th and the 2s10s spread at 1.34% from a high of 1.47% earlier this month. Maybe it was over-hyped but nevertheless, I think this suggests the market is saying: it’s ok, rates can rise. Long-end yields have jumped a lot this year and we are in consolidation mode for the time being. There are 1.9 trillion reasons why yields can continue to rise. 30-year auction is today. US CPI inflation was in line at +1.7% year-on-year, but this was the last ‘easy’ print as base effects going forward will see the number rise. The Nasdaq 100 was a little softer yesterday following the stunning +4% rally on Tuesday.

Crazy volatile: If ‘stimmy checks’ find their way into the system – and they will – meme stocks will be first in the firing line. GameStop surged yesterday before collapsing 40% all of a sudden, triggering stops all over the place. GME finished up 7% for the day at $265 but traded at a high of $348.50 and a low of $172. Another Reddit favourite, Koss, more than doubled in value before ending up 70% on the day.

A broader recovery: According to Bloomberg, the percentage of NYSE-listed shares at 52-week highs has climbed to 21%, the highest since December 2016 and rising from a low of 0.1% in September 2020. The broadening out of the rally to value and cyclicals is something we’ve been banging on about for months, but it’s yet to really translate to the FTSE. So, we come back a persistent thread – why are UK stocks not making all-time highs when the Dow and DAX are able to do so? The FTSE 100 remains 200 points or so below its January peak and some way short of the all-time high. The rotation into cyclicals and the underperformance of the UK market to peers for some years should be translating into better gains than we have seen so far: is there something wrong with our market? The pound is a lot stronger than has it been, but the prospects for global growth are too. Oil prices are rebounding and metals have hit multi-year highs. The FTSE 100 should be doing better.

One of our underperformers is Rolls Royce: shares rose 2% to 115p despite reporting a larger-than-expected loss as it stuck to previous guidance, reiterating that it expects to turn cash flow positive in the second half. Pre-tax losses amounted to £4bn last year with negative free cash flow of £4.2bn reflects an exceptional year on all fronts for the aerospace giant. Underlying revenues of £11.7bn were down from £15.4bn last year but ahead of the consensus estimate of £11.03bn. The company has sufficient liquidity even if there is no recovery this year, according to the CEO.

Oil is firmer after yesterday’s EIA inventories and a weaker dollar also supported. Bullish data on oil products more than offset another big build in crude stocks – the market is still out of alignment following the weather event in the Southern states. Stocks rose a whopping 13.8m barrels, creating at 6% the widest surplus to the five-year average since Jan. However, gasoline inventories tumbled 11.8m barrels and distillates declined by 5.5m barrels. It looks as though demand is picking up strongly in the US, and this suggests that US crude stockpiles will start to decline in line with global stocks. OPEC has helped create a deficit in the market that should see prices advance further.

Gold has rebounded and broken above the next resistance level we identified as the dollar softened and US yields retreated a touch. Near-term bulls and bears battle on the horizontal resistance around $1,740, with the next leg seen around $1,754.

Gold has rebounded and broken above the next resistance level.

GameStop soars on ‘ecommerce hopes’, stock markets diverge as investors look to bonds

Morning Note

It’s a short squeeze. It’s dealer gamma exposure. No, it’s a fundamental deep value trade based on the company’s ability to be a disruptive force in gaming and deliver a compelling e-commerce offering that supports the long-term investment thesis, which is based on an increasingly progressive free cashflow model. You never actually thought GameStop rally was just froth? Roaring Kitty made a pretty stubborn defence of the fundamental thinking behind his long GME position when he talked to lawmakers on the financial services committee. Most Redditors would agree and maybe, just maybe, there is a fundamental basis for this stock’s 930% rally year-to-date. I’m sure some people genuinely do think it will be the Amazon of gaming.  However they are probably less worried about execution risk than they might be.

 

Shares surged over 41% to almost $195 yesterday, as it looks as though GameStop has taken the first big step towards to fulfilling its latent ecommerce potential. Whilst the ousting of the CFO Jim Bell last month indicated that something was afoot, an update from the company filled in some blanks and underlined that Chewy’s Ryan Cohen is taking charge of this ship.

 

GameStop has formed a “Strategic Planning and Capital Allocation Committee” which will focus on identifying actions that can “transform GameStop into a technology business and help create enduring value for stockholders”. The committee will be responsible for evaluating areas that include GameStop’s current operational objectives, capital structure and allocation priorities, digital capabilities, organizational footprint, and personnel. The Committee is comprised of Cohen, former Chewy CMO Alan Attal, Ryan Cohen, and Kurt Wolf, another activist GME investor. In addition, the board is appointing a Chief Technology Officer and two new executives to lead the company’s customer care and e-commerce fulfilment functions, respectively. There is also a plan to replace the ousted Bell at CFO. 

 

Divergence: In the broader market, European stock markets and the Dow Jones rallied though tech weighed on the S&P 500 as the sell-off in growth and momentum continued. The DAX in Frankfurt rallied over 3% to mark a new record high, whilst the Dow Jones climbed 300pts to a record high 31,800. The Nasdaq composite declined 2.4% and the NDX 100 was off almost 3%. Tesla declined another 6% almost to $563, whilst Apple fell over 4% to $116. A record high for the Dow just as the Nasdaq enters correction territory: We’ve not see such a divergence between the industrials and growth in a long time. The S&P 500 is caught somewhere in the middle, though the weighting of the tech names (the 5 FAANGs were worth about a quarter of the market until recently).

 

It’s a buying opportunity? ARK’s Cathie Wood played down the problems at her flagship ETF, saying she is even more confident in her highest-conviction trades such as Tesla and that the selloff is simply a buying opportunity. At these moments she looks to “concentrate” portfolios to the “highest conviction names”, so this means selling more liquid stocks (eg Apple) which are participating in innovation but are not ‘pure play’ innnovators. The fact that the bull market is broadening out is a good thing, she says, and this is certainly true. But it doesn’t mean Tesla should be worth what it was valued at. She also suggested that the 60:40 stocks to bonds portfolio could one day be 60:20:20 stocks:bonds:cryptos … 

 

Clearly, everyone is looking at the bond market right now, but some are not convinced that yields are only going one way. David Tepper, the founder of Appaloosa Management, told CNBC that the move in rates may be just about over. He pointed to a flip in Japanese investors, who he thinks are likely to become net buyers of US Treasuries (after years as net sellers) following the rise in yields – the 10-year has risen from 1.09% at the end of Jan to north of 1.6%. This, he says, will cap the rise in yields. Whilst yields pared back yesterday, stocks weren’t really listening. Ten-year and 30-year bond auctions this week will be crucial tests of demand – it was a weak sale of 7-year debt last month that sent reverberations around the market. Today we have an auction of $58bn in three-year paper but it is the 10-year and 30-year offerings that will be the big test. Investors will be angsty about how these auctions go off – a repeat of the Feb 25th 7-year auction would undoubtedly create another broader sell-off in rates and lead to yet more instability in equity markets. A key unanswered question remains about whether the Federal Reserve extends looser capital requirements – the supplementary reserve requirements (SLR). Last April the Fed let banks exclude Treasuries and cash from their calculations – but this means banks are sitting on a tonne of US government bonds that would need to liquidate if the looser SLR rules are not extended. This could create further trouble in the bond market if all this were to hit the market at once. 
 
Is WFH dead? Zoom, the poster child of the work from home trade that drove much of the 2020 rally up until the November vaccine bounce, declined almost 8%. It’s now worth around half what it was at the peak in October. It was reported after the closing bell that CEO Eric Yuan has transferred about 40% of his stake in the company – valued at around $6bn- to two unspecified recipients. Another work from home name – DocuSign – declined fell over 5%, meaning it is down around a third from its recent all-time high. There are two things at work here – first is the reopening and expectations people won’t be so reliant on WFH as last year. Second, these were some of the most richly rated of the growth names and therefore most likely to be pulled down by a rise in rates.  

 

Domino’s posted strong final results as it enjoyed pandemic related stay-at-home demand. Strong appetite in the UK & Ireland saw system sales up 11.4% to £1.35bn. Underlying profit before tax of rose £2.4m to £101.2m, but this was limited by Covid-related safety costs  and other efforts to placate franchisees. The free cash improvement (+73% to £99m) was another mark in its favour. Nordic disposals have helped – it never really got a handle on the Norwegian and Swedish markets. It’s also looking to offload its Swiss and Icelandic businesses. Trading this year has started strongly with “exceptional trading” over the New Year period as the company notched its busiest ever week. The question is whether Domino’s has the momentum now to deliver its goal boosting sales growth as consumers prepare to get out and about much more? Shares rose 10% as the company also announced it was returning £88m to shareholders via a 9.1p dividend and £45m in share buybacks.

 

Shares in ITV dropped over 6% in early trade as the company reported a 16% decline in total external revenues, led by a 25% drop in Studios and 11% decline in Advertising, despite VOD being +17%. That left adjusted earnings before nasties down 21% at £573m which was not as bad as expected and was driven by the strong end to Q4 and tight cost control delivering £116m of overhead savings, of which £21m are permanent. Now the focus is on beefing up Studios earnings by working closer with streaming platforms on delivering content – anything that dilutes the importance of traditional ad revenues should be a positive, albeit consumer brand spending on media this year ought to be markedly better than last year. Indeed, whilst Q1 has been challenging management think April ad revenues are expected to be up between 60% and 75% on last year. 

 

Oil prices are proving to be very volatile. After Brent rallied to $71 yesterday it’s now trading with a $68 handle this morning. Clearly a spot of panic after the attacks on the Saudi facilities was overdone, but I stick to the view that the market is tight and will become increasingly tighter now that OPEC is rolling over cuts into April.  

Elsewhere, Bitcoin trades above $54k, its highest since around Feb 23rd, whilst gold continues to test the 61.8% retracement support at $1,690. Yesterday’s swing high at $1,714 is the first hurdle, thence $1,724.

Gold continues to test the 61.8% retracement support at $1,690.

What are meme stocks & why should you care?

Equities
Investments

The power of social media sentiment over stock prices is rapidly strengthening. The meme stocks are rising. Unsure of what they actually are? Here’s a look at what meme stocks are and whether they’re worth investing in. 

What are meme stocks? 

Meme stocks: the background 

Whether you like it or not, we live in an age dominated by social media. Instagram; Twitter; Facebook; Reddit; whatever the platform, you go there, and you’ll find memes aplenty. 

Memes are basically images or videos that go viral. Going viral is the key here. With millions of users, the power of social media in spreading information and instigating trends is massive. Whether that’s the latest funny cat video, a trend like planking, or sending certain stocks to the moon, memes are common social currency these days. 

So, where do stocks fit in? Meme stocks, also playfully called stonks, are basically stocks that are popular with Millennial investors. They trade more on hype rather than their underlying fundamentals.  

Did you get caught up in the GameStop frenzy? This is the perfect example of meme stocks in action. For those unfamiliar, investors operating out of the /r/Wallstreetbets forum on Reddit backed GameStop heavily, sending its price to the moon, before shorting the stock. Other stocks given the Reddit touch include AMC and American Airlines. 

Beyond Reddit and Twitter, those investing in stonks might also use Stocktwits, a Twitter-like platform devoted entirely to stocks. Online investor communities have millions of members. The now infamous /r/Wallstreetbets has over 9.4m subscribers – known by themselves as ‘degenerates’.  

As well as pure stocks, ETFs are emerging around the stonk space. The recently launched VanEck Vectors Social Sentiment ETF, listed on the NYSE under the BUZZ ticker, is the most prominent example. BUZZ will reportedly use an algorithm based around finding the 75 large-cap stock names that are getting the most positive discussion on the internet, principally on social media like Twitter, Reddit and so on. All companies in the ETF must have a market cap of $5bn. 

So why should you care? The GameStop experience in January showed how investing is changing amongst younger age groups. One of the main drivers for these investors was to try and instigate a big change in the whole culture of investing and trading. More cynical observers may say it was instigated to try and take advantage of Millennial naivety, but it’s unlikely that such a frenzy will happen in the way it did with GameStop stocks.  

But January 2021’s events showed how social media is shaping the way people trade and invest, and the stocks they choose to trade and invest in. That makes meme stocks a very interesting phenomenon to observe going forward. 

Should you invest in meme stocks? 

That is the big question. 

If you want to invest in meme stocks, you should be aware of their common characteristics. As mentioned earlier, they tend to be popular with the younger, Millennial investor crowd: tech-savvy investors who rely on social media platforms to find the latest tips.  

Stonks – as meme stocks are referred to sometimes – tend to be very volatile: one second, they could be soaring, the next they’re crashing back to earth. Their valuations aren’t based around fundamentals, more a collective belief in ramping them up. Looking to the future is a key part of Millennial investors’ strategies. Fear of missing out (FOMO) is also a key driver, hence why so many people hopped aboard the GameStop rocket ride. Panic selling at even the slightest headwind is a prevailing trend, which only adds to meme stock volatility.  

The risks of trading or investing in meme stocks can be very high as a result. It’s always advised any traders or investors look into doing proper research and analysis before committing any capital when picking stocks. 

But that doesn’t necessarily mean all meme stocks are pariahs worth avoiding. Some may have actual potential, whether through a visionary CEO, being at the forefront of a new industry like companies listed in ARK innovation ETFs, or at the forefront of a megatrend about to go viral worldwide.  

The trick is identifying what is pure hype and which stocks may actually have potential beyond meme status. For instance, GameStop’s rally is partly driven by an attack on the whole system of short selling, and millennial nostalgia for a company that may have had a lot of significance to them growing up, rather than good financial performance and a solid business model.  

If you do want to invest in meme stocks, then it must be stressed again there are high risks and major price volatility here. Investing in stonks may not be for the inexperienced, despite attempts by apps like Robinhood to “democratize finance”. Please do careful analysis and research before trading or investing. 

Are there any meme stocks you should watch? 

Nasdaq has identified some meme stocks it believes could offer solid returns. Whether they do or not remains to be seen, but these could be solid additions to your portfolio, should the meme momentum continue. 

Nokia 

Remember the bulletproof brick of a phone the 3310? Nokia used to be king of the mobile phone world with phones that could seemingly withstand an apocalypse scale event. The transition to smartphones hasn’t been very healthy for Nokia, but due to huge brand recognition from its glory days, and unintended US governmental boosts in an effort to curb Chinese phone maker Huawei, have given Nokia stock a bit of a boost. 

In January, NOK rose from $4.00 to topping at $6.50, although they have subsequently fallen back to $4.00. Its latest earnings report saw Nokia beat expectations, so the telecoms company may be one to watch in other quarters this year. 

Sundial Growers  

Cannabis stocks have been growing in popularity recently as its expected Joe Biden’s White House may push ahead with federal decriminalisation legislature during his four-year presidential tenure. While other more mainstream stocks like Tilray or Canopy entice traditional investors, meme stock buyers are looking to cannabis penny stocks to get their investment fix. 

Sundial Growers is one of these. While it’s high of $1.30 per share may be seen as overpriced, the company is undergoing a shift from low-margin wholesaler supplier to high-margin retail firm. The Canadian company could be one the watch for stonkers if it can pull off its transformation.  

Palantir 

Palantir and its many links to the Biden Administration have investors hoping to benefit from a solid four years for the data analytics firm.  

High revenue growth in the last quarter and better earnings have outlined why meme stock investors are looking to Palantir. If it continues to have a healthy relationship with the White House and other governments, revenues should stay strong, thus the Palantir share price should stay strong too.  

The company is looking to expand its retail offering, as most of its clients now are government bodies. If it does so, but fails to meet earnings expectations in this new direction, its meme stock shine might be tarnished. But with governments increasingly capturing and sifting through citizens’ data, Palantir may have a solid future ahead. 

Naked Brand Group 

Struggling retailers are a target for stonks investors and Naked is no different. The group is currently not doing well in the bricks-and-mortar space, so it’s winding down its physical retail side to concentrate purely on e-commerce.  

However, its current market cap of $81m makes it a bit of a small fry in the online retail world. Last year, it generated sales of $54.7m: a pittance against some of the major e-commerce giants. But it’s still very early days, and if it can grow with its renewed focus on digital, Naked could be a stock to watch. For some investors, it’s more of a gamble than others, but that is par the course for those investing in meme stocks. 

Churchill Capital Group 

Some meme stocks are part of industries looking to change the world. Electric vehicles is one of these. We’ve all seen the rapid rise of Tesla for instance. Other EV makers are trying to establish themselves before traditional car brands step up their own electric efforts. 

Churchill Capital Group is eyeing up an acquisition for luxury EV brand Lucid Motors with the aim of turning it into a Tesla competitor. A tall order, given Tesla’s head start, but as electric vehicles become the norm, Lucid Motors could establish itself as a key player. Its $69,900 Lucid Air model is already substantially cheaper than the equivalent Tesla Model S, but still sits in the same high-end sedan space. 

This deal is yet to be concrete, but CCPG is getting heavy backing from the Saudi sovereign wealth fund, which shows its Lucid ambitions might not just be the stuff of dreams. As a result, the stock is on meme stock investors’ hotlist. 

Stocks pause after rally, City to relax listings rules

Morning Note

“I’m shocked! Shocked to find that gambling is going on in here.” I was looking over some of the recent insights, edicts and proclamations on GameStop, Reddit and RobinHood and felt that market policemen do like to channel their inner Captain Renault sometimes. Anyway, GameStop is still a thing. Not least among the good people of Penarth, Wales. “World’s most avid GameStop traders live in Penarth,” proclaims the Penarth Times, providing a reassuringly British spin on this saga. Shares in GME rallied 18% yesterday to $120. Other Reddit names climbed; Koss rose 13%, AMC added 14% and Dillards climbed almost 12%. 

 

Listings rules are  to be relaxed in order to make the City more competitive again and attract more tech IPOs and SPACs. New York dominates this space, but London wants to use its new-found freedom from the EU to attract more of this sort of business. Changing rules around things like dual class shares, which let founders keep control of companies, and the level of free float required for a premium listing – which companies must secure to be included on the FTSE – will surely appeal. The Hut Group eschewed a premium listing last year so its founder could keep his hand on the tiller. Some might say that relaxing rules amounts to watering down, others will point to New York and say ‘we should be having some of that’. The boom in SPACs across the pond has clearly left London bankers a little green with envy. The City always evolves and thrives. 

 

Trustpilot clearly doesn’t mind the current regime too much: the Denmark-based online reviews platform plans an initial public offering in London this year. The full 25% of shares will be available trading, making it eligible for inclusion on FTSE indices. The IPO is expected to raise $50m for a valuation of $1bn. Revenues rose 25% last year as ecommerce picked up during the pandemic.

 

Shaking up City is just part of the chancellor’s plans for reinvigorate the UK economy (Build! Back! Better!) when he delivers his Budget tomorrow – the alliterative qualities of the word and the slogan adopted all around the world won’t be missed, I’m sure. Budgets are usually fairly orderly affairs for traders. You can rely on something for the property market, good or bad, though lately it’s been tending towards the former. As we saw yesterday, house builders are one corner of the market that always have a reaction. Tory chancellorship 101: if in doubt, juice the property market to keep the young aspiring home buyers  middle class homeowners on board. After that we start talking about cheaper pints and taxes and it’s time for the pub. Gilt markets are less concerned with tinkering on the margins as they are with global bond markets, macro-economic conditions and central bank policy, so I wouldn’t expect a big reaction in the market. 

 

This time though we’re recovering from an unprecedented economic collapse and sky high borrowing. The public finances will need repairing, so the orthodox thinking goes. Proponents of Modern Monetary Theory would argue otherwise…whatever your view, the chancellor is the only one who counts and it seems that despite the pandemic upending many norms, economic orthodoxy is not among them. The chancellor is eyeing tax hikes to repair the finances, though not all at once. Capital gains tax seems set to rise – which will have a real impact on people who own shares. What’s interesting is not that he is pursuing this route, but that there is so little debate about the merits of running higher deficits.  

Stocks pause after bounce

 

Global stocks bounced back with energy yesterday, with the S&P 500 notching its best day in nine months. The broad market rose over 2.3%, whilst the Nasdaq and small cap Russell 2000 both advanced 3%. The FTSE 100 was 1.6% higher. European stocks were flat in early trade on Tuesday as investors pause to think whether yesterday’s rally was worth it. The snapback just looked a little too vigorous to be sustained. Zoom shares rallied 8% after hours following a strong earnings beat. S

 

Bitcoin was firmer above $49k. A report from Citi suggesting Bitcoin could be the currency of choice for trade was rightly trashed by Jemima Kelly. Meanwhile Goldman Sachs is reportedly restarting its crypto desk. It is thought the bank will begin dealing bitcoin futures and non-deliverable forwards for clients next month. BCA research says ‘stay away’ and New York’s top law officer laid down the law: “Cryptocurrencies are high-risk, unstable investments that could result in devastating losses just as quickly as they can provide gains,” Attorney General Letitia James said Monday in an investor alert. 

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