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  • Volatility returns as global stocks sell off
  • GME shares surge 130%, AMC +300%
  • Apple and Tesla share decline after earnings

There is a clear sense markets are upset and concerned about what they are seeing from the Reddit ramps. The mechanics of the latest craze are rather new, which makes it hard for us market watchers to be fully versed in all that is happening. And yet the point I’d like to stress is that this kind of behaviour among investors – chasing individual stocks to the moon – has been seen a million times in the past. It usually ends one way – many profit, but most lose out. It looks a little different this time because it appears in a slightly different form, the techniques are more sophisticated, the jargon is new, the players have changed, and the technology makes it simpler to execute. But I fail to see how things are ‘different this time’. As I said yesterday, there is no problem with people making money on the market (that is the goal after all), the problem lies in crowds hijacking certain vehicles (securities like GME, AMC) and collectively ramping the stock beyond any semblance of fundamental value. Yesterday shares in GameStop surged 134% to $347, whilst AMC Entertainment stock rose an incredible 300%. Both fell sharply after hours, with GME -16% and AMC -22%. BlackBerry rose 32%, dropped 20% after hours. Bed, Bath and Beyond rose 43%, fell 12% after hours.

It would appear, there is a failure to understand that the only way to realise paper gains after this ramp (pump) is to sell (dump); and in so doing offload your unwanted stock on someone (the greater fool) who thinks it will go even higher. Which is not what stock markets are designed to achieve. Plus, it’s worth noting that short sellers make an important and valuable contribution to the smooth functioning of markets and price discovery.

The moves in $GME etc appear at first to be relatively isolated, but it’s clear they are correlated to bigger trouble – excess liquidity in the system, irrational exuberance due to stimulus cheques, and a growing disconnect between fundamentals and valuations. Dislocations are bleeding into the broader market – the S&P 500 fell over 2.5% yesterday to turn red for the year. This is the kind of febrile behaviour and mania we would associate with a broad market top. What do you expect, I hear many times over: throw trillions in monetary and direct fiscal stimulus at the economy (market) and practically nationalise the bond market to mask all price discovery and completely distort true market functioning, and this is what ensues. It’s hard to disagree. If this is as bad as it gets, then we’ve got off lightly. Indeed, whilst there are clearly frothy parts of the market, we should remain optimistic that the market as a whole is looking a lot less bubbly than it has at times in the past. Moreover, although near-term uncertainty over vaccines and growth remains, the longer-term prospects seem supported by ongoing fiscal and monetary expansion combined with earnings growth.

But for now volatility is back: Stocks fell yesterday, with the S&P 500 down more than 2.5% from record high for its worst day in three months to test its key 50-day moving average support and drop negative YTD. The Dow shed 2.1% to 30,303 for its worst day since the end of October. Front month Vix futures rose above 36 at one point, having been steady around the 25 marker until yesterday. Bonds were bid with the US 10-year benchmark yield retreating under 1% at one stage. Gold was also lower perhaps as investors retreated and perhaps sought to raise cash. European bourses are all sharply lower, taking the cue from the sell-off on Wall Street and a broad retreat in Asian equities overnight. London fell 1% to 6,500 for the blue chips at the open before extending losses. Shares in Frankfurt are down 2%. Indices are now broadly down on the year. As noted a week ago, a corrective move lower of 5-10% in Q1 was to be expected.

The Federal Reserve offered little fresh direction to markets, standing steady on rates and offering a cautious outlook on the economy. Any talk about a taper is ‘premature’, chair Jay Powell said, seeking to tamp down any thoughts that the Fed would move too soon to tighten. ‘We have not won this yet,’ Powell said. The job of the Fed right now is to provide clarity and security that it is going to continue to anchor short term rates and provide as much liquidity as markets need. And Powell’s is to make sure that careless taper talk does not cost lives. But in so doing the Fed needs to paint a rather worrisome picture of the economy.

Shares in Tesla dropped 5% in after-hours trading as the carmaker missed on earnings forecasts but beat on revenues. Elon Musk’s pay packet and cheaper models lowering margins were partly a factor in the EPS miss, which came in at $0.80 vs $1.03 expected. Revenues were a little ahead at $10.74bn. Going forward, Tesla said it expects to achieve 50% average annual growth in vehicle deliveries, and it expects even stronger growth in 2021 as two new plants come online. Tesla had a lot to live up to this quarter so it is no surprise to see a little being taken off the table by investors on the EPS miss, whilst regulatory credit income is likely to become a headwind, but the broader picture around deliveries and revenue growth looks solid. Indeed the numbers rather reflect the focus Tesla has on boosting the top line as it fights emerging competition in the EV market from established OEMs.

Apple shares were also weaker after-market despite a stunning quarter. Revenues hit a record $111.4bn, well ahead of forecasts and representing 21% year-on-year growth thanks to broad-based gains across its product suite. The iPhone 12 launch quarter was exceptionally strong, with sales +17% in iPhone, taking the installed base for iPhones to 1bn from 900m. Mac revenues rose 21% yoy, whilst iPad sales jumped 41%. As noted in our preview, growth in personal computer sales driven by pandemic trends such as work from/stay at home was always likely to boost Mac and iPad sales. Growth in Other Products – devices like the Apple Watch and AirPods, climbed to 29% yoy. Services growth reached +24% with the first quarter of Apple One subscription bundles helping to lift the category. The growing installed iPhone user base should further support Services growth in the coming quarters. We also note very strong international sales (now 64% of total sales vs 61% a year ago), whilst revenues from Greater China rose 57%. The confidence in Apple fiscal first quarter earnings was well justified and the slight pause in the shares reflects a little profit taking after a strong run in the last week, whilst the lack of guidance for the next quarter remains a thorn. A record-breaking but it should not be seen as a high watermark for Apple.

Facebook shares declined 2% after-hours, on top of a –3.5% move lower in the session proper, despite revenues hitting a record high. Q4 revenues rose 33% to $28.1bn, whilst net income surged 53% to $11.2bn. Facebook has benefitted by a big push by companies to expand their ecommerce offering during the last 12 months of the pandemic. However, investors showed caution as Facebook warned on upcoming changes to Apple’s iOS that will make it harder to get user data, harming its advertising business. As I’ve mentioned before, advertiser boycotts are for show. Monthly active users climbed 12b%.

Tequila, it makes me happy: Diageo shares rallied 3% after interim profits beat estimates with sales of spirits in North America offsetting challenges elsewhere. Reported net sales of £6.9bn were down 4.5%, with organic growth of +1% offset by unfavourable exchange rates. Organic operating profit down 3.4%, driven by channel and category mix. North America performed particularly strongly and ahead of expectations, with US on-trade partially reopened and tequila sales +80% helping the US Spirits business to +15% growth. Pub sales might be down but we are drinking more at home. Sales in Europe and Turkey declined 10%, with at-home drinkers in Britain and Northern Europe failing to offset the decline in on-trade sales in Ireland and Southern and Eastern Europe. Volatility and uncertainty means no guidance but management expect margins to improve and operating profit growth to rise faster than sales in all regions outside of North America due to the weak comparator period.

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