Week in Review: GameStop’s Short Squeeze

Video-game, consumer electronics and gaming merchandise retailer GameStop, skyrocketed this week after a wave of retail traders motivated each other on social media platforms to pile into one of the most 'shorted' companies in America, creating a massive short squeeze.

In a “short squeeze” investors (typically hedge funds) borrow shares from brokers and sell them in the market with the expectation that the price will fall so they can buy the shares back in the future, return them to the broker and then profit from the difference. The problem occurs when the price goes up (or in this case rockets up) and the short-sellers have to buy the shares back (pushing the price even higher) in the open market to return to the broker no matter what the price is.

The fear is that the GameStop mania is a sign of a larger bubble, a consequence of the extraordinary liquidity injected (and cheap money) by central banks which is finding its way into certain risk assets. The U.S. Securities and Exchange Commission said on Friday that it’s looking into this week’s retail trading fiasco and will look into regulated body’s actions to uncover if the decisions made to limit trading in certain shares disadvantaged investors.

Meanwhile, new trial results from Johnson & Johnson’s coronavirus vaccine disappointed some investors, saying its one-dose vaccine demonstrated 66% effectiveness overall in protecting against Covid-19. The vaccine was found to be less effective on some variants, being 72% effective in the US, 66% in Latin America and 57% in South Africa after four weeks, the company said.

On a positive note the International Monetary Fund (IMF) remained more upbeat and raised its 2021 global economic growth forecast to 5.5% (4.2% for 2022) in its January World Economic Outlook Update. The IMF said that “the strength of the recovery is projected to vary significantly across countries, depending on access to medical interventions, effectiveness of policy support, exposure to cross-country spillovers, and structural characteristics entering the crisis.”

In other economic data releases the US economy expanded at a 4% annualized rate in the final quarter of 2020 and contracted 3.5% for the full year, its worst performance since 1946. Growth is expected to slow further this quarter, but activity and employment should start rebounding, particularly with the benefit of the $900 billion fiscal stimulus that was passed in December.

US stocks fell sharply on Friday, wrapping up a volatile week. The Dow Jones Industrial average lost 2%, to 29 982, the first time it closed below the 30 000 mark since December 14. For the month of January, the Dow and the S&P 500 fell 2% and 1.1%, respectively, suffering their first negative month in four while the tech-heavy Nasdaq returned a 1.4% gain on the month.

In Europe, Italian Prime Minister Giuseppe Conte resigned after losing a parliamentary majority earlier this month. His decision paves the way either for a new governing coalition or snap elections. Major European indexes were also sharply down on the week with the pan-European STOXX Europe 50 Index ending the week 3.36% lower and the UK’s FTSE 100 Index down 4.30%.

Tensions continue to flare between China and Taiwan. China views Taiwan as a breakaway province of China but Taiwan sees itself as a sovereign state, with its own constitution, military, and elected leaders. In response to rising tensions the Biden administration moved a carrier battle group into the South China Sea and reaffirmed the US commitment to Taiwan as "rock solid."

The Shanghai Composite Index ended the week down 3.4%, while Japan’s Nikkei 225 Stock Average also ended the week 3.4% in the red.

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Market Moves of the Week

The International Monetary Fund warned South Africa on Wednesday about its spiralling debt, stressing the urgency of fiscal consolidation. The coronavirus has hit SA's economy hard and power cuts by state-owned utility Eskom will likely make things worse, the International Monetary Fund (IMF) said on Wednesday. The IMF forecasts a contraction of 7.5% in 2020 GDP, while 2021 growth is seen at only 2.8%.

In company news, Ster-Kinekor Africa’s largest cinema group, filed for voluntary bankruptcy, the firm said on Friday, citing losses due to COVID-19 related lockdowns, curfews, restrictions on gathering and delays in the releases of blockbuster films.

The JSE retreated along with global equity markets with the benchmark all share index ending the week 2.37% lower at 62,472 points. The rand was unable to hold onto initial gains after December data showed SA reported its eighth consecutive, monthly trade surplus and Reserve Bank governor Lesetja Kganyago said there is room for further stimulus should the country experience a third wave of Covid-19, ending the week at R15,18/$.

WeeklyMovements[3]
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Chart of the Week

Shares of GameStop skyrocketed 400% in the past week, closing out January with a massive 1,625% gain. Day traders realised that if they could push GameStop’s shares higher, that would leave its short-sellers facing big losses, propelling further price gains. The US Securities and Exchange Commission said on Friday that it was monitoring the price volatility, adding that it would “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”

Gamestop

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The information contained herein as well as the individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell, or an indication of trading intent on behalf of Carrick or any financial product. This communication is intended to be used for information purposes only by its designated recipients and is not an offer, recommendation or solicitation to transact. While it is based on information freely available to the public and from sources believed to be credible and reliable, Carrick Wealth makes no representation that it is accurate or complete or that any returns indicated will be achieved. Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning and integrated wealth management solutions. The Carrick corporate group is also licensed in Zimbabwe and Malawi, and holds three global licences in Mauritius.

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