Weekly Wrap

Weekly WrapIt’s so Obvious, it’s Obviously Wrong

Calendar Icon   Friday, 19th February 2021

Ring the Bell?

The GameStop saga has made its way into the political arena, with Congressional hearings trying to work out how the average investor was able to push GameStop’s shares so high they almost broke the system.

According to the head of Interactive Brokers, the short squeeze was so serious that it almost caused the market to collapse. What he meant was that it was so serious they had to stop trading in the stock to avoid a massive margin call.

The hearings have heard from many people involved in the original call to buy shares, including the person who goes by the “handle” Roaring Kitty. This is probably the only person to make serious money out of the saga, except for the big players, who shared a screen shot of his account with a value in excess of US$20m.

The interesting part of the hearing was the statement by Republican Patrick McHenry, who stated that:

“I think if we’ve learned anything from these past few weeks, it’s that these average everyday investors are pretty darn sophisticated,” McHenry said. “There is wisdom to the crowd.”

This comment led to the headline below from marketwatch.com, which is without doubt the single biggest warning that markets are overvalued.

Whenever a market commentator suggests that markets are not overvalued and brings out the term, “this time it’s different”, it is time to worry.

Retail investors, especially new one’s with little knowledge of how a market works, enter the market when the party is almost over. Usually the Government steps in after the party finishes.

Back in 1987, retail investors entered the market in February, buying shares in all sorts of profit-less businesses, including Bond Corporation.

In 2000, people formed day-trading clubs to replace book reading clubs and all the talk was about this new fangled dotcom era.

Now we are hearing that new investors have a wisdom about them, despite very few of them making money on GameStop. New investors never beat the market because they are entering with an optimistic base that proves untenable.

GameStop hearing challenges assumptions about rookie investors — ‘Retail investors making up this new surge are different’

Bond Market shouts a warning

In the bond market, investors are acutely aware of duration risk. This risk is when bondholders take on debt for long periods and interest rates go against their investment. This risk is a gauge of bond price sensitivity to a given move in interest rates. if you hold a bond that yields 2% and rates move to 4%, the value of your bond declines. Of course you could hold the bond to maturity and get your money back, but there is currently US$16.5 trillion of outstanding bond issues with a negative-yield globally. Holding to maturity in this case simply means the investor would lose money.

A long duration in bonds relative to low rates indicates a greater risk of a price decline in bonds when interest rates rise. The current duration of the Bloomberg Barclays Corporate Bond Index is 8.7 years. and the yield on the long bond is 1.9%.

This means that it would not take a big move higher in rates for bond prices to collapse. A collapse in the bond market would be a major problem for the global economy, especially Central banks, who would struggle to meet their debt obligations.

In February 2007, HSBC took a US$10bn hit as 2 of its mortgage based lending businesses had to be closed. The stated reason at the time was that the mortgage holders were struggling to pay their interest rates, which were rising at the time.

18 months later, Lehman Bros closed its doors and the Global Financial crisis was underway.

Facebook / Tesla / Bitcoin

Facebook decided to flex its muscles during the week in Australia stopping us from accessing or sharing news stories on their platform. Facebook won’t pay the news providers for their information, so they have decided to push back against the government trying to force them to do so.

This may backfire for Facebook as the platform has become a haven for a host of people who share their conspiracy theories about vaccines and vote rigging with very little reliable information.

Tesla made the news on the 8th of February 2021, when they announced the company had bought US$1.5bn worth of Bitcoin. In what is probably a first for the company, they have made a paper profit as Bitcoin went over US$50,000 for the first time.