Making sense of the markets this week: February 8, 2021

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

Redditors vs Wall Street: Act II

Last week, the news headlines and this space were dominated by the investing enthusiasts who gather online at Reddit and their attack on hedge funds. Redditors targeted funds that were short-selling (and would profit if stock prices went down) by driving up the prices of selected stocks to alarming levels—GameStop (GME), BlackBerry (BB), Bed Bath and Beyond (BBBY), and others. 

At the height of their battle, the army of Redditors marched GameStop to $468 per share. This week, the stock price fell by almost 90% to below $55. 

Similarly, from recent highs BlackBerry fell by 50%. Bed Bath & Beyond fell by 50%. AMC fell by over 60%. Prices on the Redditors’ collection of short squeezes continue to fall on Thursday, Feb. 4, as I write this post. 

Here’s a roundup of Redditor short squeeze targets from Twitter… 

Source: Twitter

So, is it game over for the Redditors’ movement? For those who bought at the top or near the top—who will they sell to? Many will be left holding the bag. That GameStop stock might only be worth $10 or $20 in the end. There will be some deep losses. 

No one knows for sure as to what is going on behind the scenes, but I’d guess that the Redditor retail investors are being played by the professional traders and hedge funds that are still in the game. They live for this kind of volatility, and they have the trading tools to see what’s going on before it happens. 

Redditors have to play this game of poker showing all of their cards, while professional traders and hedge funds get to keep their cards close to their chest. It’s not a fair fight. I am not on the side of “the man” (hedge funds) but I would guess that they will eat those Redditors on the way down, on the way up, back on the way up—and, well, you get the picture. 

Contacts who are more connected to the hedge-fund and professional-trader industry suggest to me that the above is very likely. Many of the pros have profited from the volatility and are more than ready to play the game again. 

I chatted with Mike Philbrick from ReSolve Asset Management, who offered… 

“You don’t punish ‘the man’ in markets by pumping prices and volumes higher—that rewards ‘the man.’ Insiders of BB, AMB, GME were dumping their stocks relentlessly, and market-makers provided their services and made their profits.” 

Moreover, this squeeze action isn’t good for anyone. “The market is being purged of all short sellers,” Philbrick told me. “This is not a good thing and it will lead to a more volatile market as short investors serve a very crucial and stabilizing force in the markets.” 

Ultimately, it’s likely a minor event in stock-market history. The markets appear to have sorted this out and have moved on, unworried about the uncertainty and disruption: U.S stocks were up over 4% for the week after Thursday’s close, and Canadian stocks followed suit. In fact, stocks were threatening to close at record highs on Thursday, in Canada and the U.S. 

This week, the markets have seen a squeeze on silver. It was short lived. The Reddit group behind last week’s GameStop action say they aren’t behind this one; and whomever it was may have bitten off more than they can chew. A massive and in-demand international commodity such as silver is a whole different ball game. Silver moved to above $29 an ounce on Monday, but the price fell back to the vicinity of $26 an ounce, where it traded the previous week. This effort fizzled in quick order. 

And silver didn’t need any help. It’s up over 45% over the last year. 

Many think this Redditors’ story has largely run its course. I would have to agree, though I would not be surprised to see some skirmishes here and there in the future. Redditors might focus on some easy targets if they can catch a hedge fund that is too exposed on a short position. 

That said, word on the street is that hedge funds will be very careful in the near future. 

Earnings season is still in high gear

In the U.S. and Canada this week, we saw earnings reports from many of the most famous stocks and market leaders. 

Alphabet, the holding company for Google (GOOG), moved to an all-time high in advance of earnings. And then on earnings release on Tuesday, the sock price tacked on another 5%. Many of the giant tech leaders continue to separate from the pack. 

From Seeking Alpha… 

Source: Seeking Alpha

The tech beasts keep on beating. That may continue to drive the core index funds and the core ETF portfolios higher. “Passive” indexing continues to work. 

Energy giants reported this week, as well. And, as expected we see the weakness in revenue and earnings as travel of all types has been restricted. Prospects for energy producers should increase tremendously once we get to a more open economy and start to put the pandemic in the rearview mirror. The pent-up demand for travel is tremendous. 

You may have noticed that the price of oil has moved in anticipation of greater and more widespread North American and global economic growth. Oil is near one-year highs with, Brent Crude near US$60 on Thursday, Feb. 4. 

The following examples represent the general trend this quarter: 

Suncor had a smaller loss than expected

Revenue of C$6.6B (-29.3% year over year). The company says it plans to pay down C$1B-C$1.5B of debt and buy back C$500M-C$1B of shares in 2021. 

U.S. Energy giant Conoco Phillips (COP)

Revenue of $6.05B (-21.5% year-over-year) beats by $1.36B.

Production of 1,118 vs 1154 Mboe/d consensus.

Canada Goose stock flies as earnings soar

The stock price of Canada Goose (GOOS) was up over 22% on Thursday after announcing earnings. Wholesale revenue (sales from retail partners) in the quarter was $160.8M vs C$130.1M consensus. Direct-to-consumer revenue was C$299.4M vs C$276.7M consensus. Gross margin was 66.8% of sales vs 66.0% a year ago and 65.9% consensus.

Canada Goose is a Canadian success story with an incredible brand and product. 

Canadian tech darling Open Text delivered

Open Text (OTEX) gained 7% after posting fiscal Q2 beats, with revenue up 11% year-over-year to $855.6M and EPS of $0.95, $0.10 ahead of estimates.

  • Cloud Services and subscriptions sales totalled $350.5M, up 41% year-over-year. Customer support sales increased 6% to $334.5M.
  • Operating cash flow totalled $282.5M with FCF of $274.8M.
  • Adjusted EBITDA was up 14% to $360.8M. 

The Canadian tech sector is certainly more than the runaway success story known as Shopify. You might also have a look at Lightspeed

Boring Bell comes to life

Bell Canada (BCE) also reported some very solid numbers. I hold BCE. While stocks are not bonds, it is a very decent bond ‘substitute’. The yield is very generous (currently just below 6%) and offers solid dividend growth. BCE reported a 5.1% dividend increase with the latest earnings release. 

This week, Bell also took some heat for recent layoffs in the media division. On the other side of the coin, they announced they will spend $1 billion to expand 5G across the country. Job creation will move to that growing segment in the near term. 

Here are a few highlights: 

  • Net earnings increased 28.9% to $932 million in Q4 with net earnings attributable to common shareholders of $889 million, or $0.98 per common share, up 32.3%; Q4 adjusted net earnings of $731 million generated adjusted EPS of $0.81, down 5.8%.
  • Adjusted EBITDA down 3.2% in Q4 on 2.8% lower revenue and 2.6% reduction in operating costs.
  • 92,928 total wireless postpaid net additions in Q4; postpaid mobile phone net additions of 86,590 up 27% year over year.

The stock price increased 2.1% on Thursday, Feb. 4 after earnings were announced that day, before the market opened for trading. The stock price has delivered nothing over the last five years. I’m happy to collect that big dividend, and to see the stock move. Any future capital gains will be a bonus. 

Is inflation galore in store?

Is inflation on the horizon? That is a common theme or expectation these days. And we might be seeing some of the canaries sacrificed to the coal mine for inflation expectations. Here’s a headline from Wolf Street… 

Inflation Galore at Manufactures, amid Massive Shifts in Demand, Supply-Chain Snags, Shortages, Lack of Shipping Capacity. And They’re Passing it On

We’re already seeing surprising inflation in the production of goods. The prices index surged dramatically in January—up 82.1%. It was the fastest expansion since 2011. 

This may be one of the big stories as the global economy comes back to life. 

From that Wolf Street post… 

“And ‘amid favourable demand conditions,’ manufacturers were able to pass these higher costs on to their customers via higher prices, ‘with selling prices rising at the fastest pace since July 2008’.”

Supply chains are challenged, thanks to the pandemic, but demand for goods soared in 2020 at the expense of travel and experiences. 

“The report too assumes that the supply conditions will start to improve, and ‘these price pressures should ease,’ but they ‘could result in some near-term uplift to consumer goods price inflation’.”

And we’ll certainly see a tectonic shift as we start to get to the other side of the pandemic in 2021 (fingers crossed on that). There is so much pent-up demand for travel, dining and entertainment—from sports to theatre to moviegoing and more. There is much chatter of a roaring 20s that we might see after the pandemic eases. The parallel is that the original Roaring 20s—the 1920s—occurred after the conclusion of an influenza pandemic. Hmmm? 

More widespread, pent-up demand for goods and services could stoke inflation. While many in the retail sector were crushed in 2020, others who are more affluent were not affected as much or at all by the pandemic. They are flush with cash as they had fewer places to spend in 2020. Spending might be unleashed.

This report on Seeking Alpha shows that inflation is already heating up in the services sector. 

What’s an investor to do? 

Inflation is often dismissed. That’s our recency bias at work, as we’ve been in a disinflationary environment since the 1980s. Even the thought of stagflation gets dismissed with a laugh. That said, it might be prudent to protect your wealth and portfolio. 

For starters, you can add a component of inflation-adjusted or real return bonds. They will deliver the bond yields plus an inflation adjustment. Gold and gold stocks are known as a tried-and-true safe haven and inflation-hedge investment. You can use ETFs for that exposure. Commodities are also a core inflation hedge. There are funds that offer that exposure, too; for example, here’s an ETF from Horizons and a U.S.-dollar offering from ProShares

A slight shading to a materials ETF or oil and gas stocks or ETFs might also provide a nice hedge. You can get an all-in-one solution by way of Purpose Diversified Real Asset Fund

I’ve been adding to my gold ETFs and I will start to layer in one of the commodities funds, as well as continue to add to a real return bond fund. 

Jeff Bezos to step down as Amazon CEO

Jeff Bezos will step down as CEO of Amazon in the third quarter of 2021. 

One could argue that no company was better positioned for the pandemic than Amazon. With retail stores closed and people reluctant to shop in-person due to COVID risks, we all went online and shopped with Amazon. Well, many of us. For the record, I’ve never purchased anything by way of Amazon, and I’ve never used Uber Eats or Skip the Dishes. 

When I posted that brag on Twitter a few millennials offered up a few versions of “OK Boomer.” 

But most did shop online, and the growth of Amazon revenues and profits in 2020 was nothing but spectacular. And here’s how they closed out the last quarter of 2020. 

The following is courtesy of Seeking Alpha: 

Source: Seeking Alpha

And we can see that guidance (estimates of the next quarterly results) points to even more gains in 2021, with revenue growth potentially approaching 40%. In late September 2020, I cheekily offered that one day, we’ll all work for Amazon

I’ll get my resume ready.

And, as for Mr. Bezos, talk about going out on top. 

Dale Roberts is a proponent of low-fee investing who blogs at Find him on Twitter @67Dodge

The post Making sense of the markets this week: February 8, 2021 appeared first on MoneySense.

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