The Big Short Squeeze Is Over
Keep your eye on the investing 'ball'... GameStop and the other 'short squeeze' stocks crater... The Big Short Squeeze is over... What happens after Wall Street 'de-risks'?... More fuel for the 'Melt Up'...
The sideshow is just about over...
DailyWealth Trader editors Ben Morris and Drew McConnell described the GameStop (GME) saga well last week. In their Friday issue, Ben and Drew wrote about it like a crazy circus scene...
A circle of elephants stand on their hind legs, threatening to come down and crush their trainer at any moment.
A woman wearing a dress of raw meat lowers herself into a glass pool full of piranhas.
Six guys on motorcycles swirl around the inside of a big steel ball... Every second, a wreck seems imminent.
Your head jerks around from one act to another, trying to take it all in. You don't want to miss any of the action...
"What has gotten into these people? This is crazy," you think. "Maybe I should get closer."
Meanwhile, just outside of the circus tent, a train rolls by... leaving stacks of $100 bills on the track behind it. You hear it faintly...
The moral of the story, as Ben and Drew wrote on Friday, is this...
We admit, we're watching the action in GameStop and other highly shorted stocks with interest. It's an exciting phenomenon... And it offers gamblers the ability to make or lose massive amounts of money in a hurry.
But it is a distraction. Even if you do want to participate, hopefully you know enough to keep your position size small.
If you want to put real money to work, follow a "money train" – a big market trend with a history of rewarding shareholders and a lot of track ahead.
With that in mind, they went on to offer a one- to two-year trade on an industry leader in a fast-growing space that world governments and private companies are only just beginning to throw huge amounts of money into... green energy.
Why now?
Ben and Drew's recommended stock, a multibillion-dollar firm, was trading at an attractive price near its 50-day moving average... a short-term indicator that a recent pullback in the stock may have run its course.
This opportunity, and others, are right there for investors like yourself to see, if you only step away from the circus... or if you keep your eye on the investing "ball," so to speak.
We're thinking similarly today...
No doubt, when an army of individual traders – some more sophisticated than others – combine to make a bunch of hedge funds lose billions of dollars, it would be unhuman to ignore what's happening.
Your friends or family might still be asking you about the "GameStop story" – Why is everyone so mad at Wall Street? – and it might still be on your mind, like it is ours...
There are larger questions and themes to reckon with, as we wrote about last week, and more to investigate about the whole thing. But in the short term, practically speaking, the Big Short Squeeze bubble – as we'll call it, referencing the Michael Lewis book-turned-movie – has popped.
You won't hear too many people say it on the news tonight, so we will...
Shares of GameStop lost roughly two-thirds of their value over the past two days... And it's not a wise bet to think they'll be going back higher any time soon.
It's a similar story with the other bid-up, left-for-dead companies – like headphone maker Koss (KOSS), which was down about 43% today, and BB Liquidating (BLIAQ), the last remnant of movie-rental chain Blockbuster, which fell roughly 61% on the day.
But the whole episode – more like a Netflix (NFLX) miniseries, actually – that captivated Main Street attention last week has left an enduring mark on Wall Street. It's one that might surprise some investors...
In the spirit of peeling our eyes away from the circus like Ben and Drew, we stepped back a bit recently to take in the aftermath of the investing world's most recent in a long, long line of bubbles...
And we see that, if anything, the end of this short-lived bubble suggests potentially higher levels in the major U.S. stock indexes in the months ahead...
Broadly speaking, as we wrote last week, retail-buying frenzies happen in frothy 'Melt Up' fueled markets...
That has been a hallmark of our colleague Steve Sjuggerud's Melt Up thesis since he first started spreading the idea years ago... And nothing has changed this time. A bunch of Redditors capturing the investing world's attention is proof of the appetite for stocks today.
But as we've noted coming out of March's market crash, there are important dynamics below the top-line trends... For one, since the pandemic hit, investors still had a lot of money sitting on the sidelines in "safe havens" like cash, bonds, or money-market accounts.
In the first quarter of 2020, an eye-popping $3 trillion went into money-market funds as people fled the stock market and feared a continued crash. We wrote about this in the November 18, 2020 Digest... and noted then how a lot investors were just starting to rotate back into riskier assets like stocks – given the low-yield environment of everything else.
That's exactly what kept happening...
In the third quarter of 2020, money flowed out of money-market mutual funds on balance for the first time since 2016. And it happened at a scale ($1 trillion) not seen since the last two quarters of 2009 and the first quarter of 2010 – the start of the post-financial-crisis, record-long bull market in U.S. stocks. Take a look...
At the same time, the "M1" money supply in the U.S. – a measure of households' most liquid assets or funds most readily accessible for spending – is again at an all-time high near $7 trillion. What's more, household cash has grown about $3 trillion since the start of the pandemic. As Stansberry NewsWire editor C. Scott Garliss explained back in November...
That's the opposite of what one would expect during a recession, let alone a pandemic... But that also speaks to the spending power of the U.S. consumer... And don't forget, that makes up 70% of the economy.
Combine that with entrenched "easy money" policies from the Federal Reserve... low rates pushing folks into stocks for a meaningful return... talk of even more fiscal stimulus on the way... pent-up demand to just do things and buy stuff...
And you have plenty of fuel for Steve's Melt Up thesis.
Move ahead to last week, and we got more...
A few hedge funds got crushed when their leveraged short sales on GameStop and other stocks surprisingly went the wrong way fast at the hands of eager individual investors. The pros reportedly lost at least tens of billions of dollars in their GameStop trades alone...
As Scott explained to NewsWire readers on Friday, when that happened, these hedge funds' losses (53% for Melvin Capital Management, for instance) became too painful for managers to stomach...
They were forced, financially and emotionally speaking, to "de-risk" – and have enough cash on hand to cover these short sales – by selling other long positions to raise cash to essentially live for another day. As Scott wrote...
In the minds of these hedge funds, the investing environment has become irrational. They're safer getting out of the way than staying involved. At the moment, they feel that's the best way to protect their clients' money and their business futures. The hope of these money managers is the dust will settle and they'll go back to investing once more.
For anyone looking for much more detail on the whole story, Scott's piece is a must-read. And here's one more big point from Scott that we want to share in the Digest today...
The Reddit-driven short squeeze has forced hedge funds to unwind risk, reducing their exposure to the stock market... And that means they're poorly positioned for a move higher in the S&P 500 Index.
When you look past the circus, you clearly can see what Scott's talking about...
This scale of 'de-risking" has happened before, just for different reasons...
Check out this chart that Scott shared... It shows data from Morgan Stanley's prime brokerage, which many hedge funds use to conduct their business.
This data set essentially reflects when and how much Wall Street hedge funds using Morgan Stanley's brokerage have sold long positions to cover short sales going back to the end of 2018. You'll see it happened in March 2020... in September 2019... and during the fourth quarter of 2018...
Prime brokerage data is important because that's where investment managers house their money and assets. When hedge funds are shorting stocks, they need to borrow shares from someone. That's one type of service prime brokers provide. And they also provide things like leverage for funds to employ in an effort to increase returns.
But when you see a chart like this from a prime brokerage unit, it tells you those funds are unwinding their positions and exposure.
If you've been invested in stocks over the past few years, you might remember that each of these instances happened during times when the major U.S. indexes dropped significantly... and then rebounded in a big way.
Now, you could look at this two ways...
We haven't seen a sharp drop in U.S. stocks recently. And aren't we overdue for a correction anyway? Sure, that makes sense on the surface... And a near-term correction might be the logical thing to happen.
But for one, remember that markets are very often not rational. And secondly, unlike the others, this short-squeeze frenzy wasn't a broad event like a pandemic, a trade war, or a Fed-induced pullback.
It did expose how leverage really works and why it's important to understand anything that you buy... as well as the fact that your broker can change the game on you.
But zooming out, as Ben and Drew described, this was simply a market sideshow... a relatively isolated short-squeeze bubble against left-for-dead companies – and the hedge funds that were betting against them.
It's just about finished, as today's market action showed.
Even Robinhood, the no-fee broker that might have felt the most pain and public shame after it decided to stop traders from buying shares of GME and others – because it couldn't afford to let the sideshow keep going – somehow is emerging relatively OK.
The company was able to convince people to give it a quick $3 billion over a few days just to keep its operations going, as mandated by its U.S. Securities and Exchange Commission-regulated clearinghouse.
At least on the surface, that doesn't exactly ring of a major crisis lingering for weeks and months ahead... especially with an amount of money not seen in a decade coming out of the safest assets around, like money-market funds.
And recent history presents another compelling point that the medium-term result of the rapid rise and ending of the Big Short Squeeze bubble may be higher stock prices in the future...
Following Wall Street's four most recent 'de-risking' periods, stocks took off in the months afterward...
Scott gave a rundown on numbers in his piece on Friday...
After bottoming in the fourth quarter of 2018, markets rallied about 30% throughout 2019. From September 2019, the S&P 500 rallied 9% through the end of the year... and more than 14% to start 2020 before COVID-19 caused markets to crash. Starting in March 2020, the S&P 500 rallied 52% in five months and 68% through the end of the year.
Scott, who spent 20 years working for institutional funds on Wall Street before joining Stansberry Research, believes we could see the same kind of thing happen this time. He brought up an old investing maxim to paint a picture of the dynamic at work here...
"The stock market tends to do what hurts the most people the most."
What that means in reality is when there's a lot of money sitting it out, the market will go higher before sucking them back in. And then, when they're all invested, it will go back down again because the only thing they can do is sell.
And that's exactly what this chart could be showing us. Hedge funds have reduced exposure to the markets. Now, they're poorly positioned for a market move higher.
Said another way, a good number of Wall Street money managers are licking their wounds and have taken money off the table because of what happened. But they're paid to put it to work...
It might sound counterintuitive, but it means they'll want to get back in to make up for their losses. And that push, in response to one of the most unlikely bubbles we've seen, might be precisely why we see a move higher in U.S. stocks in the months ahead.
Could Silver Hit $100 an Ounce This Year?
A serious case is building for silver to hit triple-digit prices and gold to double its current price of around $1,830 an ounce, according to popular market insider Lobo Tiggre...
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New 52-week highs (as of 2/1/21): First Majestic Silver (AG), American Homes 4 Rent (AMH), CoreSite Realty (COR), Commvault Systems (CVLT), Quest Diagnostics (DGX), Eagle Materials (EXP), Futu Holdings (FUTU), ICICI Bank (IBN), Microsoft (MSFT), Nuveen Municipal Value Fund (NUV), Sprott Physical Silver Trust (PSLV), Silvergate Capital (SI), First Trust Cloud Computing Fund (SKYY), and TFI International (TFII).
In today's mailbag, feedback on yesterday's Digest from Stansberry Asset Management's Michael Joseph about an overlooked "Made in the USA" trend for the next decade. Do you have a comment or question? As always, send us an e-mail at feedback@stansberryresearch.com.
"My wife and her daughter ALWAYS look for a 'Made in the USA' label, and are disappointed when they don't find one. They are immigrants from Mainland China. (My wife is now a naturalized U.S. Citizen and my step-daughter is a Lawful Permanent Resident (Green Card)). They absolutely don't want anything from China because they want better quality, and many of their Chinese friends here have the same attitudes. There is a sizable body of immigrants in the U.S. and I think many of them would appreciate finding more products made here." – Paid-up subscriber P.S.
"Biden's plan to reduce taxes for manufacturing companies that reshore??? Gee... I wonder why Trump didn't think of that... Just another copycat move like his 'vaccine distribution.' Too bad he's overturning more than he's keeping, to the detriment of our energy industry (yeah, Canada isn't too keen on us cancelling the XL Pipeline either, and now getting us back into the useless Paris Climate Accord, and, the quagmire of war in Syria sending more troops there.) Mark my words, our energy independence will evaporate, and we'll get sucked back into the Middle East squabbles again." – Paid-up subscriber Jackie D.
All the best,
Corey McLaughlin
Naples, Florida
February 2, 2021