Market Insights - The Big 'Little' Short Squeeze

Macroeconomic and Market Developments:

• North America stock markets finished lower this week. The TSX Composite was down 2.85% and in the US, the Dow was down 3.28% and the S&P 500 was down 3.31%.
• The Canadian dollar was down this week, finishing at 78.15 cents vs 78.5 cents last Friday.
• Oil prices were flat this week. The Canadian WCS price finished around $40 this Friday, unchanged from last week. Similarly, WTI crude finished flat at roughly $52.00, almost unchanged from last Friday as well.
• Gold prices were down this week, closing at $1,845 vs $1,859 last Friday.
• U.S. Real GDP grew at a 4.0% annual rate in Q4, very close to the consensus expected 4.2%. The largest positive contributions to the real GDP growth rate in Q4 were personal consumption, residential investment, and business fixed investment. The weakest component was net exports. Personal consumption, business investment, and home building, combined, grew at a 5.6% annual rate in Q4 but are down 1.7% in the past year. U.S. Nominal GDP (real GDP plus inflation) rose at a 6.0% annual rate in Q4 but is down 1.2% from a year ago.
• Calgary-based Enerplus (ERF) announced on Monday that it is acquiring Bruin E&P HoldCo, LLC for $465M in cash. In conjunction with this, the company announced a $115 million stock offering at $4.00 per share. Bruin’s properties are located in the North Dakota region of the Williston Basin, near current Enerplus properties.
• Telus Corp (T) is moving closer to spinning out its subsidiary Telus International, in an IPO expected to close by the end of March and raise roughly US$500 million. Telus International provides outsourced customer service for companies like Uber, Zynga (maker of online games), and Fitbit. The shares will trade on both the TSX and the New York Stock Exchange.
• This week saw some crazy trading in some out-of-favour stocks as Reddit users bid up prices in an attempt to rebel against short-sellers. The stock that received the most attention was gaming retailer GameStop (GME-US) which rose an incredible 400% this week and is up 1,625% so far this year. Canadian company Blackberry (BB) was one of the stocks caught up in this similar trading action. Despite issuing a press release stating that they do not know of any new information that would be affecting the stock price, Blackberry’s stock price finished last week at $17.86, traded as high as $36.00, and finished the week back down at $17.96. Even with the stock finishing flat, it is still up 113% so far this year.
• Canada's December building permits were released this week and showed a decline of 4.1%, better than the estimates of a 4.7% decline. Statistics Canada noted that declines were reported in every component except single-family dwellings. Gains in seven provinces, led by Newfoundland and Labrador, were largely offset by a significant decrease of 13.2% in Ontario.
• A new Covid-19 vaccine from Novavax Inc. (NVAX-US) was effective in large-scale trials in the U.K. and South Africa. However, the effectiveness in South Africa was lower, suggesting that the virus is starting to mutate in ways that could make vaccines less effective over time.
• Total global cases of COVID-19 finished this week at 101.9 million, with the total deaths at 2.20 million. In Canada, total cases now stand at 766,103, with active cases at 57,020. In Alberta, total cases are 122,821, with active cases of 8,041.
• For a deeper dive, the US investment company First Trust has put out a US COVID-19 Tracker. Click here: COVID TRACKER

Charts of the Week:

With all the hype this week surrounding GameStop, we thought it would be timely to send some interesting charts that show just how wild the market movements have been in some of the most heavily shorted (loathed) stocks by hedge funds in the US. No matter what happens with the stock market going forward, at the very least we should expect some very entertaining stories to come from this moment in history. Seeing a book on the shelves at some point this year titled “The Big Short Squeeze” would not be a surprise. We will get to the “little” part of our title in a moment. If you follow the markets in the news at all, I’m sure you’re at least vaguely familiar with what’s going on right now with r/WallStreetBets and the public company GameStop. The r/WallStreetBets is a subreddit where participants, now numbered at approximately 6 million, discuss stock and option trading. It has become notable for its aggressive trading strategies, which have primarily revolved around highly speculative, leveraged options trading. If you recall during the 2008 Financial Crisis, there was a short selling ban to try to stem the losses at big institutions, and now today we are seeing what could be referred to as a “long ban” by some of the brokerages to supposedly “save the little guy” from harming themselves. With the share price of GameStop moving incredible percentages on an intraday basis this week, one would think there are definitely many losing. On Wednesday, the stock gapped up 140% prior to the open, then wildly moved up and down to finish the day roughly where it started. Yesterday, the stock jumped 40% in the first half hour, then dropped 77% over the next hour and a half, then rose 190% over the next hour, and fell back down again another 40% to finish the day down 45%. Today, up 68%. According to information from trading site Robinhood, 56% of their customers own at least some GameStop stock.

The sharp moves higher in these heavily shorted stocks like GameStop is something rarely seen. As you can see below (top chart), of the largest 3000 stocks in the US, the decile of the most heavily shorted stocks (~300) was up an average of 38% year-to-date as of Wednesday. However, as you can see from the second chart, these 300 stocks only make up 1.9% of the US stock market. The parabolic move in these small names could certainly be described as a bubble, however, the impact of this to the overall market is extremely low. The top two deciles of the largest companies in the US (600 names), usually the ones that are the least shorted, are actually down slightly this year (third chart). One could hardly call the current situation of speculative moves in heavily shorted names as a market bubble overall, when over 88% of the total market capitalization is down on a year-to-date basis (bottom chart).

Source: Bespoke Investment Group

To put all this above into context, the last chart we wanted to share is the performance of the S&P 500 index in the US based on market cap decile in the last six months, compared to the six months leading up to March 2000 (Dot Com bubble) as a point of reference. Yes, some valuations have been stretched recently in the US, but those are only very small pockets of extremes. The key difference between today and 2000 is that the extremes occurring now are in much smaller areas of the market. Like GameStop, the most heavily shorted stocks that have gone parabolic lately make up a tiny portion of the market. Back in the late 90s, the Dot Com names with barely any earnings or revenues became some of the largest stocks in the market. Today, the largest stocks in the market generate massive revenue numbers. Looking at Apple specifically, they just posted quarterly revenues of $111 billion. This was $8 billion higher than estimated by analysts. That $8 billion “beat” is a larger amount of money than the revenues of all these current short squeezes combined. While the crazy price spikes of late like those of GameStop are certainly eyebrow-raising and anecdote-worthy, it is the health of the top-end of corporate America that will determine the direction of the market, and so far, both earnings and guidance have been very positive for the ‘mega-caps’ this season. So, the current “Biq Short Squeeze” going on right now is only “Little”, in context of the overall markets.

Source: Bespoke Investment Group

 

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Government of Alberta, Johns Hopkins, oilprice.com, Canaccord Genuity Corp, Tony Dwyer, Bespoke Investment Group