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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.

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