Weekly Market Comment: Friday, January 29th

(Game)Stop the presses

When the U.S. Treasury department states they are “keeping an eye” on the trading frenzy around GameStop, and a few other names, you know the situation is verging on the ridiculous.

A pack of internet chat room users whipped up a frenzy to fight off Wall Street short sellers, sending the stock up a mind-blowing 425% withing a few days.  A related company, AMC, saw its shares rise 400% on Wednesday alone.

Elon Musk perpetuated the mania by tweeting a link to the chat group, having himself done battle (and beaten) short-sellers.

But GameStop is no Tesla, being an old-fashioned bricks and mortar shopping mall retail store that sells old-fashioned physical game cartridges. They’ve lost money in eight of their past ten quarter.

“GameStop has become a pyramid scheme,” said one Wall Street analyst.  “Pyramid schemes work as long as new investors believe there will be new investors behind them when it’s clear nobody else is going to come in, they are less likely to participate.”

Even Robinhood recognized the recklessness of these internet chat groups, banning users from buying GameStop, AMC, Blackberry and some others (unless the buying was to cover a short position). The move had the obvious effect: their share prices tumbled. It had the less obvious effect of having Rep. AOC and Sen. Ted Cruz agree with each other that banning the little guy from buying while hedge funds are allowed to trade at will was unfair (but don’t expect these two firebrand politicians from opposite extremes of their respective parties to work with one another anytime soon).  Another possible reason (and more likely in our opinion) is that Robinhood shut down trading of names like GameStop was because the brokerage firm did not have the capital to continue trading in certain volatile names.  This explains why they raised $1 billion from investors including Citadel to ensure they had the capital to handle client trades and meet any cash demands form client accounts.

Short-squeezes can be powerful.  We recall when Krispy Kreme Donuts used to be called “unshortable” because it just went up.  That is, until its chronic losses exposed an accounting fraud and was kicked off the public exchanges by the SEC.  More recently, the marijuana operator, Tilray, catapulted to over US$250 per share due to a small float and rabid investors, crushing all short-sellers who dared call-out its valuation.  Today, it sits at $18 and change today.

GameStop shares will suffer a similar fate.  The only question is “when?”

For fun, here is a guide to deciphering Reddit stock slang:

Tying the invisible hand

A new presidential executive is calling for U.S. government procurement spending to buy American.  This protectionist sentiment is not just a spill-over of the Trump era - which issued no more than 10 executive orders itself surrounding the “buy America” theme -  but goes back to the Hoover’s Buy America Act of 1933.  Agencies are required to favour U.S. bidders on products worth over $10,000, defined by companies that make at least half of their products in America but not more than 6% more expensive than foreign made alternatives.

These attempts to skuttle foreign suppliers is nothing new and may not amount to much, argues The Economist. It is rarely easy for government to effectively place its thumb on the scales of commerce and do so effectively without incurring unintended consequences.  Without local established supply chains, projects stand to get delayed waiting for parts, as happened when the Obama administration mandated American water infrastructure get supplied by American components (some of which were not produced in America).

The net effect will not only result in some unintended economic consequences, but also serve as a reminder to Canadians that being forced to vacation in Canada due to boarder closures, isn’t so bad.

To infinity and Beyond

Beyond Meat is expanding beyond meat, announcing plans to work with PepsiCo (the world’s largest drinks seller) to offer plant-based beverages.  The market loved it, sending their stock sharply higher.  We recently mentioned our little-known Legacy name Burcon Nutraceuticals and their partnership with Bunge and Nestle.  Without knowing details of BYND’s plans, we are confident that Burcon’s fully soluble, almost tasteless high-quality protein isolate is better than anything anyone else has tried. It is certainly better than what Beyond has been using in its meatless meat where all sorts of flavour masking and fillers hide the chalky taste of protein isolates out on the market today.

We got some fortunate news with another Legacy holding. UPS decided to sell its trucking segment for $800 million to the much smaller Canadian-based trucking company, which we own in some of our legacy portfolios.  Rare is it when both the buyer and seller of assets see their shares move higher but we’ll take it. Having stronger control of local trucking routes should materially benefit TFI’s margins and earnings.

(source: The Wall Street Journal)

Noteworthy links:


Musings Beyond The Markets

An estimated 1/3rd of Americans have been diagnosed with Covid-2.

There are other variants, like the British variant, Brazilian variant, South African variant and a California variant. The best known is the British one, which appears to be about 50% more transmissible than the standard variant. That same mutation is in the S.A. and Brazilian variant, as well as extra variants. Those extra variants suggest they may partially side-step the current vaccines, though it is likely that the vaccines can still kill those variants, but just not as effectively.

Working against these negatives are better treatment procedures than 6 months ago.

Is the vaccine safe? The CDC stated that for every 1 million people vaccinated, approximately 2.1 people taking the Moderna drug suffered a severe allergic reaction that is treatable (though can be deadly if not treated), and for the Pfizer drug it was 6.2 cases per million. While such dangerous allergic reactions are extremely improbable, it is why patients with no history of allergy are asked to remain in a waiting area for at least 15 minutes while those with allergy histories remain for 30 minutes.

Compare this to 16,500 deaths per 1 million Covid diagnoses, not to mention the risks of long-term negative side-effects such as brain fog, fatigue, and organ damage.

As for mild side effects such as pain in the injection site, feeling tired, muscle aches/pains, headache and chills, the CDC says these are signs that the immune system is being fired up and responding positively.

For more, click this YouTube recording of the White House coronavirus task force presentation and go to the 6:30 minute mark.