Friday, January 29, 2021

Weekly Commentary: The Great 2021 Squeeze Mania

Yet another week for the history books. For posterity: GameStop gained 400%, AMC Entertainment 278%, Express 235%, Siebert Financial 122%, Cel-Sci 75%, Novavax 74%, Vaxart 68%, Fulgent Genetics 60%, Vir Biotechnology 59%, National Beverage 54%, and Fossil 47%. Ominously, the VIX Index spiked to almost 38.

Retail vs. the Hedge Funds. David vs. Goliath. Main Street Beating Wall Street. The democratization of finance for all. A Bloomberg headline from December: “Robinhood Is Not Gamifying Markets. It’s Democratizing Them.” Social media orchestrating a bloody short squeeze assault upon the hedge funds. The first month of the new year begins with chaos in our nation’s Capital and ends with market mania chaos – both manifestations of Acute Monetary Disorder. Society Out of Kilter.

Shorting and even so-called “squeezes” have been part of markets for centuries. From a 2008 Reuters article, “Short Sellers Have Been the Villain for 400 years”: “In 1609, a merchant contracted to sell shares in the Dutch East India Company in the future, sending the company’s share price into a plunge. A year later, the authorities imposed the world’s first ban on short selling.”

My first experience with a short squeeze was in 1991. I was working for a bearish hedge fund that had just wrapped up a bountiful 1990. The economy was sinking into recession, the banking system was in trouble, and the U.S. was heading into war. Prospects for our fund could not have appeared brighter. Then, seemingly out of nowhere, disaster struck. Short Squeeze.

We had a handful of positions both heavily shorted and illiquid. These were also shorted by the leading short hedge fund at the time that, trapped by the squeeze, was “blowing up.” Hedge funds had even invested in short hedge funds specifically to garner a list of short squeeze candidates. It was dog-eat-dog, ruthless, manipulative and bloody within the nascent hedge fund industry.

There was another brutal squeeze following the Fed’s Q4 1998 LTCM bailout – a squeeze that unleashed 1999 speculative blow-off “tech” Bubble dynamics. And a decent squeeze fueled record market highs after the Fed’s 2007 subprime blowup emergency measures. A big squeeze unfolded in 2009 after the Fed’s $1 TN QE-fueled market recovery. There were “mini” squeezes in 2011, 2013 and 2018.

Last March’s unprecedented Federal Reserve (and global central bank) crisis response unleashed a historic squeeze dynamic. Squeeze poster child Tesla surged about 700%, surely inflicting the largest ever losses from an individual company short position. The Goldman Sachs Most Short Index rallied over 200% off March lows, ending 2020 up more than 50%. The shorts came into 2021 significantly impaired and vulnerable.

The retail “Robinhood” online trading community strolled merrily into 2021 in the money, emboldened, and understandably overconfident. After all, the Fed last year rigged the “investing” game to ensure maximum payouts. Some during 2020 caught on to the market peculiarity that there’s no quicker way to posting hefty trading gains than to be on the right side of a short squeeze. This week the Manic Crowd discovered this phenomenon – and a spectacular mob scene erupted. I appreciate that the retail trading community especially despises the “unsophisticated” label after a year of capturing such heady trading gains. But, as a group, they have no idea the fire they’re playing with.

A well-known market pundit on Bloomberg Wednesday morning celebrated the retail traders’ defining success over the hedge funds. That the online trading community would profit from unwise and unwieldy short positions was nothing short of a marvel of Capitalism.

What we’re witnessing poses a risk to Capitalism – an out of control mania. The Madness of Crowds. I’ve been increasingly disturbed by the manic nature of online equities and options trading. These concerns were only elevated by throngs of online traders partaking in a chaotic squeeze episode. Many must be inexperienced in such cutthroat market warfare and surely do not comprehend the risk.

Squeezes are pernicious market dislocations that ensure significant wealth transfers. There are big winners and losers – the ultimate game of chicken pitting greed versus fear. Some hedge funds will not survive this ordeal. Other funds will profit handsomely from the squeeze - and likely then turn their sights on exposed retail traders. There will be winners in the retail community – that will for years enjoy bragging rights for nailing the Great 2021 Squeeze.

Hopefully I’m wrong on this, but most will be losers. Before this is all over, many will blow up their trading accounts and exit the casino in dismay – or worse. Short squeezes always have a pyramid scheme component. It’s musical chairs, and the velocity with which squeeze stocks eventually collapse will be a shock to many. There was outrage Thursday after Robinhood and other online brokers restricted trading in a limited number of stocks. But just wait until this Bubble implodes, and there’s blood in the (Main and Wall) Streets. Trading systems were stressed this week by millions of buy orders. How will the system function under the stress of tens of millions of panicked sell orders? I’ll presume worse than March.

Things get crazy at the end of cycles. To what scale of craziness during the waning days of an epic super-cycle? From this perspective, it’s only fitting that Crowds of retail traders discover the short squeeze game – the ultimate speculation. It’s also a conspicuously late-cycle phenomenon. Indeed, ears were ringing this week from sirens blaring warnings of trouble ahead.

January 27 – Bloomberg (Lu Wang and Melissa Karsh): “Hedge funds are slashing their stock exposure at the fastest rate in more than six years as a wave of volatility tied to some of their most-prominent bets forced a retreat from the market… The Goldman Sachs Hedge Industry VIP ETF, tracking their most-popular stocks, tumbled 4.3% for the worst day since September.”

A significant “risk off” deleveraging event is likely now unfolding. The dislocation in the short stock universe has inflicted serious losses across hedge fund strategies. These drawdowns dictate risk control measures, moves to reduce exposures including long holdings. Liquidation of the favorite longs (and resulting underperformance) has only exacerbated problems for long/short and some factor quant strategies. Losses along with general market uncertainty and instability have begun to force de-risking/deleveraging across strategies. Moreover, how much of the recent market advance was fueled by options-related buying (and associated leverage)? If it’s as significant as I suspect, the market is further vulnerable to self-reinforcing options-related deleveraging.

Treasuries provided a notably weak hedge this week against instability in the risk markets. Ten-year Treasury yields dipped only two bps with the iShares Long-Term Treasury ETF (TLT) gaining 0.1%. This highlights a potentially problematic dynamic for levered “risk parity” strategies, in particular. At this point, various strategies that incorporate a Treasury hedge would appear vulnerable to losses and deleveraging. Hedge fund managers – along with their investors – will now watch anxiously for the next shoe to drop. Bubbles are self-reinforcing and appear to function splendidly so long as speculative leverage is increasing. As we witnessed as recently as last March, they don’t work in reverse.

While on the subject of deleveraging, Friday from Bloomberg under the headline, “China Engineers Biggest Cash Squeeze Since 2015 to Avoid Bubbles:” “Beijing is so fearful of speculative manias that authorities are creating the biggest liquidity crunch in more than five years, roiling Chinese stocks and bonds and freezing a key funding market. The cost of overnight interbank borrowing surged 29 bps to 3.3433% on Friday, the highest since March 2015 and above the yield of China’s 10-year government debt. Earlier this month the overnight rate was just 0.6%. The real rate was even higher for some would-be borrowers, with brokers offering funds at 10% or higher... ‘The market is under huge liquidity stress,’ said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group.”

The Shanghai Composite dropped 3.4% this week, with the growth-oriented ChiNext Index slammed for 6.8%. Major equities indices were down 5.5% in Taiwan, 5.2% in South Korea, 7.1% in Indonesia, 6.2% in Philippines, 9.4% in Vietnam and 6.7% in India. EM equities were under significant pressure as well in Eastern Europe and Latin America. For the most part, EM currencies and bonds suffered only modest losses, though the Mexican peso was hit for 2.9%.

Beijing has clearly made the decision to rein in some Bubble excess. Previous efforts were postponed, more recently due to the U.S. trade war and then by the pandemic. I’ll assume officials will proceed cautiously. Perhaps Beijing observes the U.S. struggling with myriad issues and believes now is opportune timing for China to take some needed medicine. I also assume that even timid tightening measures have potential to destabilize fragile Chinese and global finance.

Hedge fund de-risking coupled with Chinese tightening measures hold potential to evolve into a powerful global deleveraging dynamic. And if global “risk off” does materialize, the myth of central bank control over liquidity will again be challenged. The Bubble Thesis held that global leveraged speculation was at unprecedented extremes even prior to the pandemic. I fear leverage and speculative excess have expanded significantly since last year’s Fed and global central bank market bailouts.

I do have some empathy for our Fed Chair. This historic Bubble has been decades in the making, though his Fed has certainly orchestrated some crucial finishing touches. Powell was noticeably uncomfortable Wednesday. He clearly has no answers for fundamental questions regarding how the Fed should respond to the most speculative market environment imaginable. The Fed has been unrelenting with huge liquidity injections right into a mushrooming market mania. Aggressive stimulus measures have promoted historic leveraged speculation. Now Powell is facing the possibility of acute financial instability and crisis after a year of creating $3.3 TN of additional liquidity. He knows this, and it must be deeply unnerving.

New York Times’ Jeanna Smialek: “I was hoping that you would first react to the wild ride that GameStop stock has had this week. And then secondarily, you and your colleagues have repeatedly made it clear that you really plan to use macro-prudential tools as the first line of defense when it comes to financial stability risks, but your macro-prudential tools primarily apply to the banks. I’m wondering what your plan is, if you see some sort of large financial stability risks emanating from the non-bank financial sector in the coming months, especially as it relates to search for yield kind of activities, what do you see as the solution there?”

Chair Powell: “So, on your first question, I don’t want to comment on a particular company or day’s market activity or things like that… In terms of macro-prudential policy tools…, we rely sort of always on, through the cycle, macro-prudential policy tools, particularly the stress tests and also the elevated levels of liquidity and capital and also resolution planning that we impose on the largest financial institutions.

We don’t use time varying tests and tools as some other countries do. And we think it’s a good approach because for us to use ones that are always on because we don’t really think we’d be successful in every case in picking the exact right time to intervene in markets - so that’s for banks. You really asked about… the non-bank sector. And so, we monitor financial conditions very broadly. And while we don’t have jurisdiction over many areas in the non-bank sector, other agencies do.

And so, we do coordinate through the Financial Stability Oversight Council and with other agencies who have responsibility for non-bank supervision. And in fact…, in the last crisis the banking system held up fairly well so far. And the dislocations that we saw from the outsized economic and financial shock of the pandemic really appeared in the non-bank sector. So that’s, right now, we are engaged in carefully examining, understanding and thinking about what in the non-bank sector will need to be addressed in the next year or so.”

CNBC’s Steve Liesman: “…I wonder if I could follow up on Jeanna’s question here. I understand that you do address issues of valuations through macro-prudential policies in the first instance, but there’s a range of assets, and I know you do watch a range of assets, but from bitcoin to corporate bonds, to the stock market in general, to some of these more specific meteoric rises in stocks like GameStop, how do you address the concern that super easy monetary policy, asset purchases and zero interest rates, are potentially fueling a bubble that could cause economic fallout should it burst?”

Powell: “Let me provide a little bit of context. The shock… from the pandemic was unprecedented both in its nature and in its size, and in the amount of unemployment that it created, and in the shock to economic activity. There’s nothing close to it in our modern economic history. So, our response was really to that, and we’ve done what we could first to restore market function, and to provide a bit of relief, then to support the recovery, and hopefully we’ll be able to do the third thing - which is to avoid longer run damage to the economy.

Our role, assigned by Congress, is maximum employment and stable prices and also look after financial stability. So, in a world where almost a year later we’re still nine million jobs at least, that’s one way of counting it, it can actually be counted much higher than that, short of maximum employment. And… the real unemployment rate is close to 10% if you include people who have left the labor force. It’s very much appropriate that monetary policy be highly accommodative to support maximum employment and price stability, which is getting inflation back to 2% and averaging 2% over time.

So, on matters of financial stability, we have a framework. We don’t look at one thing or two things. We… made that framework public after the financial crisis so that it could be criticized and understood, and we could be held accountable. And… we do look at asset prices. We also look at leverage in the banking system. We look at leverage in the non-banking system, which is to say corporates and households, and we look at also funding risk.

And if you look across that range of readings, they’re each different. But we monitor them carefully. And I would say that financial stability vulnerabilities overall are moderate. Our overall goal is to assure that the financial system itself is resilient to shocks of all kinds. That it’s strong and resilient, and that includes not just the banks, but money market funds and all different kinds of non-bank financial structures as well.

So, when we get to the non-financial sector, we don’t have jurisdiction over that, so I would just say there are many things that go in… to setting asset prices. If you look at where it’s really been driving asset prices, really in the last couple of months, it isn’t monetary policy. It’s been expectations about vaccines, and it’s also… fiscal policy. Those are the news items that have been driving asset values in recent months.

So, I know that monetary policy does play a role there. But that’s how we look at it. And I think that the connection between low interest rates and asset values is probably something that’s not as tight as people think because a lot of different factors are driving asset prices at any given time.”

Liesman: “Mr. Chairman, do you rule out or see as one of your tools in the toolkit the idea of adjusting monetary policy to address asset values?”

Powell: “So… that’s one of the very difficult questions in all of monetary policy. And we don’t rule it out as a theoretical matter. But we clearly look to macro-prudential tools, regulatory tools, supervisory tools, other kinds of tools rather than monetary policy in addressing financial stability issues. Monetary policy we know strengthens economic activity and job creation through fairly well understood channels. And a strong economy is actually a great supporter of financial stability. That will mean strong, well-capitalized institutions, and households will be working. And so we know that.

We don't actually understand the trade-off between - …if you raise interest rates and thereby tighten financial conditions and reduce economic activity, now in order to address asset bubbles and things like that. Will that even help? Will it actually cause more damage, or will it help? So, I think that’s unresolved. And I think it’s something we look at as not theoretically ruled out, but not something we’ve ever done and not something we would plan to do. We would rely on macro-prudential and other tools to deal with financial stability issues.”

Bloomberg Wednesday interviewed former Fed governor and current Colombia University professor Fredric Mishkin: “I actually think that people overdo their focus on the stock market as driving things. In fact, Bubbles in the stock market, per se, when they burst are not really the problem for the economy. They can be dealt with. It’s when it involves the Credit markets. The thing that caused the problem in terms of the last global financial crisis was not the stock market – not the fact that there were changes in asset prices, per se. It was the fact that when that happened, it really affected the Credit markets and caused them to seize up. That’s not where we are right now. So, I think that people focus on the market – people could lose money, they could do stupid things, you can have Bubbles, there’s the crazy things that are happening with GameStop and so forth – but that actually very rarely has a major effect on the economy unless it interacts with the Credit markets, which I don’t think is what we’re seeing right now.”

Dr. Mishkin should spend some time with the Fed’s Z.1 report, while giving serious thought to what transpired last March. Never has U.S. Credit expanded so rapidly. Moreover, this Credit is largely non-productive. There is also strong support for the thesis that the current scope of speculative Credit is unprecedented. At this point, we’re an unexpected market-induced tightening of financial conditions away from major financial and economic issues.

Bubbles are mechanisms of wealth redistribution and destruction. And it’s generally the “middle class” that becomes most vulnerable. They have perceived wealth to lose while typically lacking the wherewithal of the wealthy to protect themselves. It’s worth recalling that Nasdaq lost 78% of its value in 30 months when that Bubble burst in 2000. Tens of millions suffered from the bursting of the mortgage finance Bubble. Yet never has the household sector been as exposed to a financial Bubble as it is today.

I hate the thought of devastating losses – in online trading and investment accounts and retirement savings. There will be public outrage, followed by a regulatory crackdown. It will prove further destabilizing for an already troubled society. There will be further loss of trust in our institutions.

I don’t share the sentiment that today’s short squeeze has anything to do with Capitalism. Instead, I expect to spend the rest of my life defending free markets and Capitalism more generally. Today’s fragile Bubble is a product of failed policymaking doctrine, inflationism and years of deepening Monetary Disorder. The Fed has made a catastrophic mistake in repeatedly backstopping markets, distorting risk perceptions, and perpetuating history’s greatest period of financial and speculative excess.

January 29 – Bloomberg (Alan Mirabella): “The GameStop Corp. saga is another sign of the growing intolerance among those with opposing views that’s roiling the U.S., according to Bridgewater Associates’ founder Ray Dalio. ‘What concerns me more is the general anger -- and almost hate -- and the view of bringing people down that now is pervasive in almost all aspects of the country,’ Dalio said… ‘That general desire to hurt one another’ is of concern, he said.”

The corrosiveness of unsound money is as insidious as it is today conspicuous. Inflationism has already wrought irreparable damage upon the fabric of our society. The cost of the most recent $3 TN Fed “money printing” melee is just beginning to come into clearer focus. The next few TN risk a systemic crisis of confidence and social mayhem. Their inflation and unemployment mandates will be the least of the Fed’s worries.

For the Week:

The S&P500 dropped 3.3% (down 1.1% y-t-d), and the Dow fell 3.3% (down 2.0%). The Utilities declined 1.3% (down 0.6%). The Banks sank 5.8% (down 0.1%), and the Broker/Dealers fell 4.0% (unchanged). The Transports sank 6.0% (down 3.3%). The S&P 400 Midcaps fell 5.0% (up 1.5%), and the small cap Russell 2000 dropped 4.4% (up 5.0%). The Nasdaq100 lost 3.3% (up 0.3%). The Semiconductors sank 6.1% (up 3.3%). The Biotechs slumped 2.9% (up 4.3%). With bullion slipping $8, the HUI gold index fell 1.8% (down 5.3%).

Three-month Treasury bill rates ended the week at 0.0475%. Two-year government yields slipped a basis point to 0.11% (down 1bp y-t-d). Five-year T-note yields declined one basis point to 0.42% (up 6bps). Ten-year Treasury yields declined two bps to 1.07% (up 15bps). Long bond yields slipped two bps to 1.83% (up 19bps). Benchmark Fannie Mae MBS yields declined a basis point to 1.43% (up 9bps).

Greek 10-year yields slipped a basis point to 0.68% (up 6bps y-t-d). Ten-year Portuguese yields declined three bps to 0.04% (up 1bp). Italian 10-year yields sank 11 bps to 0.64% (up 10bps). Spain's 10-year yields fell three bps to 0.10% (up 5bps). German bund yields dipped one basis point to negative 0.52% (up 5bps). French yields were unchanged at negative 0.28% (up 6bps). The French to German 10-year bond spread widened one to 24 bps. U.K. 10-year gilt yields increased two bps to 0.33% (up 13bps). U.K.'s FTSE equities index dropped 2.9% (down 2.7% y-t-d).

Japan's Nikkei Equities Index sank 3.4% (up 0.8% y-t-d). Japanese 10-year "JGB" yields rose slightly to 0.05% (up 3bps y-t-d). France's CAC40 fell 2.9% (down 2.7%). The German DAX equities index slumped 3.2% (down 2.1%). Spain's IBEX 35 equities index sank 3.5% (down 3.9%). Italy's FTSE MIB index fell 2.3% (down 3.0%). EM equities were under pressure. Brazil's Bovespa index declined 2.0% (down 3.3%), and Mexico's Bolsa lost 3.8% (down 2.5%). South Korea's Kospi index sank 5.2% (up 3.6%). India's Sensex equities index dropped 5.3% (down 3.1%). China's Shanghai Exchange fell 3.4% (up 0.3%). Turkey's Borsa Istanbul National 100 index lost 4.5% (down 0.2%). Russia's MICEX equities index stumbled 3.1% (down 0.4%).

Investment-grade bond funds saw inflows of $6.017 billion, while junk bond funds posted outflows of $1.329 billion (from Lipper).

Federal Reserve Credit last week expanded $12.9bn to $7.385 TN. Over the past year, Fed Credit expanded $3.267 TN, or 80%. Fed Credit inflated $4.574 Trillion, or 163%, over the past 429 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week fell $8.4bn to $3.533 TN. "Custody holdings" were up $98.6bn, or 2.9%, y-o-y.

M2 (narrow) "money" supply increased $10.0bn last week to a record $19.560 TN, with an unprecedented 47-week gain of $4.142 TN. "Narrow money" surged $4.210 TN, or 27.3%, over the past year. For the week, Currency increased $8.3bn. Total Checkable Deposits sank $67.1bn, while Savings Deposits jumped $64.5bn. Small Time deposits fell $7.9bn. Retail Money Funds rose $12.2bn.

Total money market fund assets gained $19.5bn to $4.327 TN. Total money funds surged $705bn y-o-y, or 19.5%.

Total Commercial Paper rose $10bn to $1.068 TN. CP was down $51bn, or 4.6%, year-over-year.

Freddie Mac 30-year fixed mortgage rates fell four bps to 2.73% (down 78bps y-o-y). Fifteen-year rates slipped a basis point to 2.20% (down 80bps). Five-year hybrid ARM rates were unchanged at 2.80% (down 44bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down two bps to 2.89% (down 85bps).

Currency Watch:

January 25 – Bloomberg (Stephen Roach): “After an initial spike higher, the dollar has been falling steadily since the Covid-19 pandemic took hold in the U.S. last March. It is down about 10% to 12% relative to America’s major trading partners, dropping to its weakest levels since early 2018… There is more to come. Based on a wildly unpopular forecast that I made in June of a 35% decline in the value of the dollar by the end of 2021, we are only in the third inning of a nine-inning baseball game. If that forecast comes to pass, it will provide an important exclamation point on the first year in office for America’s 46th president, Joe Biden.”

For the week, the U.S. dollar index increased 0.4% to 90.584 (up 0.7% y-t-d). For the week on the upside, the British pound increased 0.2%, and the New Zealand dollar rose 0.1%. On the downside, the Mexican peso declined 2.9%, the South Korean won 1.4%, Australian dollar 0.9%, the Japanese yen 0.9%, the Norwegian krone 0.8%, the Swedish krona 0.8%, the Swiss franc 0.8%, the Canadian dollar 0.3%, the euro 0.3%, and the South African rand 0.1%. The Chinese renminbi increased 0.81% versus the dollar this week (up 1.52% y-t-d).

Commodities Watch:

January 27 – Bloomberg (Marcy Nicholson): “With U.S. lumber prices at fresh record highs, construction companies and wood wholesalers are buying just enough to get by, threatening to make price swings even bigger. Lumber futures in Chicago reached a record $855.10 per 1,000 board feet…, having surged more than 30% since Jan. 12. This price surge during what is typically a winter lull has surprised the industry, raising homebuilding costs and forcing many buyers to purchase only their immediate needs.”

The Bloomberg Commodities Index rallied 1.2% (up 2.6% y-t-d). Spot Gold slipped 0.4% to $1,848 (down 2.7%). Silver surged 5.3% to $26.914 (up 1.9%). WTI crude dipped seven cents to $52.20 (up 8%). Gasoline added 0.3% (up 10%), and Natural Gas jumped 4.8% (up 1%). Copper fell 1.9% (up 1%). Wheat jumped 4.5% (up 4%). Corn surged 9.3% (up 13%). Bitcoin rallied $1,319 or 4.0%, this week to $34,641 (up 19.2%).

Coronavirus Watch:

January 28 – Associated Press (Michelle Liu and Mike Stobbe): “A new coronavirus variant identified in South Africa has been found in the United States for the first time, with two cases diagnosed in South Carolina, state health officials said… The two cases were discovered in adults in different regions of the state and do not appear to be connected. Neither of the people infected has traveled recently…”

January 25 – CNBC (Berkeley Lovelace Jr.): “The Minnesota Department of Health said… it has confirmed the first known U.S. case of a more contagious coronavirus variant originally found in Brazil.”

January 24 – Wall Street Journal (Stephen Fidler): “The emergence of new variants of the virus that causes Covid-19—including one in the U.K. that British officials say could be more deadly than earlier versions—signals a future in which health authorities are locked in a cat-and-mouse battle with a shape-shifting pathogen. Faster-spreading coronavirus strains that researchers fear could also make people sicker or render vaccines less effective threaten to extend lockdowns and lead to more hospitalizations and deaths, epidemiologists caution… ‘We’re living in a world where coronavirus is so prevalent and rapidly mutating that there are going to be new variants that pop up,’ Anthony Harnden, a physician who advises the U.K. government, told Sky News. ‘We may well be in a situation where we end up having to have an annual coronavirus vaccine’ to cope with emerging strains.”

January 26 – Bloomberg (Christopher Palmeri and Emma Court): “California and other large states are loosening Covid restrictions just as scientists warn that more-contagious variants of the virus are beginning to take hold in the U.S. and the vaccine rollout struggles. With a two-month spike in cases beginning to subside, California Governor Gavin Newsom is lifting the state’s stay-at-home order. New York, Illinois, Michigan and Massachusetts also are easing restrictions. The shift comes as new Covid-19 cases and hospitalizations are declining. Still, the new variants… are setting off alarms…”

January 26 – Bloomberg (Kristen V Brown): “The U.S. faces a steep uphill struggle in gearing up to monitor Covid-19 variants, a key part of watching for the emergence of dangerous mutations that might spread quickly, evade vaccines or kill more infected people. Other countries, such as the U.K., have established robust, nationwide surveillance programs to identify new Covid genomes and track the spread of existing ones. But the U.S. has not: It ranks 32nd in the world for the number of sequences completed per 1,000 Covid cases…”

January 25 – Reuters (Guy Faulconbridge, Kate Holton): “British Prime Minister Boris Johnson said… he was looking at toughening border quarantine rules because of the risk of ‘vaccine-busting’ new coronavirus variants. New variants of the virus that causes COVID-19 are opening up the prospect of a much longer battle against the pathogen than previously thought. Scientists fear the new variants may be more deadly, and that vaccines may be less effective against them.”

January 29 – CNBC (Berkeley Lovelace Jr.): “Johnson & Johnson said Friday its single-dose coronavirus vaccine was 66% effective overall in protecting against Covid-19. The vaccine, however, appeared to be less potent against other variants.”

Market Mania Watch:

January 28 – Bloomberg (Michael P. Regan and Vildana Hajric): “How wild was the action in the stock market on Wednesday? Wildest on record, if you judge by volume of shares traded. More than 23.6 billion shares of U.S.-listed equities changed hands, the most in Bloomberg data going back to 2008. The spike stands out even though volumes have been heavy since the pandemic began roiling markets last year, averaging 14.4 billion a day in 2021 before yesterday and 10.9 billion last year. That compares with an average of less than 7 billion shares in 2019.”

January 28 – Financial Times (Philip Stafford, Alice Kantor and Leo Lewis): “The frenzied battle between amateur investors and hedge funds pushed trading volumes on Wall Street past a peak set at the height of the financial crisis in 2008. More than 24bn shares changed hands in the US on Wednesday, exceeding the high in October 2008… That was matched by a record 57m options contracts traded, surpassing the 48m record set at the onset of the pandemic… Membership of Reddit’s r/WallStreetBets community, where amateur investors gather and share tips, has exploded in recent days. Between Wednesday and Thursday this week, the number of users rose from 2.8m to 4.3m, with about 316,000 people announcing on the platform that they were buying options, up from a little more than 60,000 on Wednesday.”

January 26 – Bloomberg (Vildana Hajric and Katherine Greifeld): “It’s a racetrack adage that nobody has ever bet enough on a winning horse. In the options market, they keep trying. Flush with winnings in stocks like GameStop Corp. and Tesla Inc., the smallest options traders, those who buy or sell 10 or fewer contracts at a time, have piled into record bullish bets in the last three weeks, adding nearly 60 million call options, according to… Sundial Capital Research. That’s 20% above the volume late summer, itself a period of unprecedented exuberance. Whipped up by chat-room chatter and riding a hot streak for the ages, newbie day-traders show no signs of reining in their bullishness. It’s a showcase of influence that draws daily warnings from the old guard.”

January 27 – Financial Times (Laurence Fletcher): “A growing number of companies are joining Tesla in the sky-high valuation club, dividing Wall Street between those warning of a ‘bubble’ and those questioning traditional assumptions about how best to value a business. Tesla was a red-hot stock even before the coronavirus crisis, boasting a forward price/earnings ratio — a common measure of the value the market puts on a business’s future profits — of 75 times at the start of 2020… But now that stocks have hit new record highs, and share prices and profits become increasingly detached, 29 big companies trade on even higher earnings multiples. Tesla itself has moved to 209 times expected earnings. ‘Nobody cares if you’re profitable these days,’ said the… head of one large hedge fund…”

January 25 – Bloomberg (Lu Wang): “When someone identifies as a bear, normally it means they’re selling. In this market, where anyone who dares do that gets crushed, it just means you’re a little less bullish than everyone else. That’s according to a survey by the National Association of Active Investment Managers, which found that in the current distribution of sentiment, a bear is someone who is 75% invested in stocks. ‘You hold your nose and you buy,’ David Kudla, chief investment strategist at Mainstay Capital Management LLC, said… ‘Stocks have been divorced from fundamentals.’”

January 24 – Wall Street Journal (Gunjan Banerji): “Investors are piling into bets that will profit if stocks continue their record run. Options activity is continuing at a breakneck pace in January, building on 2020’s record volumes… More than half a trillion dollars worth of options on individual stocks traded on Jan. 8 alone, the highest single-day level on record, according to Goldman Sachs… analysts…”

January 26 – Financial Times (James Bianco): “For a sign of the current mood of stock markets and retail investors, one index put together by Goldman Sachs provides a telling insight. The investment bank has compiled an index of technology sector shares that do not produce profits, traditionally a main driver of stock market valuations. Since mid-March, the index is up nearly 400%.”

January 26 – Wall Street Journal (Justin Baer and Peter Rudegeair): “Stock trading volume has surged in the past week, and Wall Street’s online brokers are struggling to keep up. In recent days, clients of Fidelity Investments, E*Trade Financial Corp., Charles Schwab Corp. and Vanguard Group have encountered brief delays executing trades or temporarily lost access to vital account information. The service disruptions came during a period of frenetic trading, largely driven by individual investors. ‘These outages generate annoyance among investors in the short term,’ said William Trout, director of wealth management at Javelin Strategy & Research. ‘Longer-term, outages call into question the stability of these platforms, even if the need for greater capacity can be addressed.’”

January 27 – Bloomberg (Joanna Ossinger): “The turmoil in parts of the U.S. stock market caused by the WallStreetBets crowd has prompted a veteran U.S. trader to ditch his old playbook built up over decades. Larry Peruzzi, the head of international trading at Mischler Financial Group Inc. and a more than three-decade veteran of market action, said he’s spending less time looking at stock fundamentals… ‘We are currently looking a lot less at the balance sheets and a lot more at the chat rooms, trade quickly and avoid trying to use any valuation while trading,’ Peruzzi said. ‘It doesn’t make sense, but in 2020/2021 would we expect anything less?’”

January 26 – Bloomberg (Ksenia Galouchko and Lucca de Paoli): “It’s reality-check time for ESG funds. Exchange-traded funds investing in companies with responsible environmental, social and corporate governance practices lured a record $85 billion in the U.S. and Europe in 2020, and are still raking it in. Pumped up by the flows, stocks in many of these funds are trading at frothy price-to-earnings multiples that are increasingly hard to justify. Take U.S. fuel-cell maker Plug Power Inc., for instance. The unprofitable company’s more than 2,000% rally since early 2020 outpaces even Tesla Inc’s.”

Market Instability Watch:

January 27 – Financial Times (Robert Smith, Laurence Fletcher, Madison Darbyshire, and Eric Platt): “A ‘short squeeze’ that started on Wall Street swept across the globe on Wednesday, triggering another day of frenetic moves in the share prices of companies with large bets levied against them. The White House press secretary Jen Psaki said the Biden administration was ‘monitoring the situation’ as shares of companies including GameStop, the hard-hit cinema owner AMC and BlackBerry surged in a volatile day of trading. The dramatic moves highlight the growing influence of retail traders, who have organised on the message board site Reddit. The group has focused on pushing up stocks that are the subject of large short bets by hedge funds. Their success in rallying the stock price of GameStop has vindicated a group now targeting companies on both sides of the Atlantic.”

January 29 – CNBC (Maggie Fitzgerald): “Robinhood raised $1 billion overnight from investors to shore up its balance sheet as the brokerage app was set to ease restrictions in the trading of certain volatile stocks… The money raised was on top of $500 million the broker accessed through credit lines to ensure it had the capital required to keep allowing its clients to trade stocks like GameStop and AMC Entertainment.”

January 27 – Bloomberg (Jordan Fabian and Jennifer Epstein): “The U.S. Securities and Exchange Commission said it is ‘actively monitoring’ volatility in options and equities markets amid a surge in GameStop Corp. and other companies over the past week that prompted Democratic Senator Elizabeth Warren to demand action from regulators. ‘Consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants,’ the SEC said…”

January 27 – Bloomberg (Katherine Greifeld): “The Reddit-led hunt for heavily shorted stocks is migrating to the options market. The most-hated stocks have scorched the naysayers, with a Goldman Sachs… basket set for its best month since at least 2008. That’s been accompanied by a ‘dramatic shift’ in options activity toward heavily-shorted securities…, according to Barclays Plc analysts. Frenzied buying of short-dated call contracts has exacerbated the pain for the bears. Normally dealers selling the bullish options buy the underlying stock as a hedge. With enough volume -- and there’s been plenty -- that can drive the stocks higher… While retail traders had previously favored large-cap tech stocks, the pivot into smaller companies has amplified their heft… ‘The spotlight has pivoted from Large Cap Tech/‘Retail Favorites’, to a largely ignored corner of heavily shorted smaller cap stocks,’ wrote Barclays analysts… ‘In a span of a month, retail trading has significantly impacted price action and sentiment in these heavily shorted names, cementing the dominance of retail option investors.’”

January 27 – Wall Street Journal (Gunjan Banerji, Juliet Chung and Caitlin McCabe): “The power dynamics are shifting on Wall Street. Individual investors are winning big—at least for now—and relishing it. An eye-popping rally in shares of companies that were once left for dead including GameStop Corp., AMC Entertainment Holdings Inc. and BlackBerry Ltd. has upended the natural order between hedge-fund investors and those trying their hand at trading from their sofas. While the individuals are rejoicing at newfound riches, the pros are reeling from their losses. Long-held strategies such as evaluating company fundamentals have gone out the window in favor of momentum. War has broken out between professionals losing billions and the individual investors jeering at them on social media. Meanwhile, the frenzy of activity is stirring regulatory and legal concerns, as well as the attention of the Biden administration. The White House press secretary said… that its economic team, including Treasury Secretary Janet Yellen, is monitoring the situation.”

January 28 – Bloomberg (Katherine Burton, Hema Parmar and Melissa Karsh): “For once, Main Street is beating Wall Street. In a matter of weeks, two hedge-fund legends -- Steve Cohen and Dan Sundheim -- have suffered bruising losses as amateur traders banded together to take on some of the world’s most sophisticated investors. In Cohen’s case, he and Ken Griffin ended up rushing to the aid of a third, Gabe Plotkin, whose firm was getting beaten down… Cohen’s Point72 Asset Management declined 10% to 15% so far this month, while Sundheim’s D1 Capital Partners, one of last year’s top-performing funds, is down about 20%. Melvin Capital, Plotkin’s firm, had lost 30% through Friday.”

January 26 – Bloomberg (Lu Wang): “With a full-blown retail raid targeting their short books, many of the stocks hedge funds are bullish on are suddenly in trouble, too. That has prompted the industry to cut their risk appetite at the fastest pace in more than a year. Square Inc., Roku Inc. and Peloton Interactive Inc., among the industry’s favorite stocks, each tumbled at least 3% Tuesday... The Goldman Sachs Hedge Industry VIP ETF (ticker GVIP), tracking hedge funds’ most popular stocks, fell for a fourth straight day, the longest stretch since October. That coincided with a 15% rally in a basket of the most-hated shares over the stretch.”

January 26 – Reuters (Radhika Anilkumar): “Top securities regulator in Massachusetts thinks trading in GameStop Corp stock… suggests there is something ‘systemically wrong’ with the options trading surrounding the stock… ‘This is certainly on my radar,’ William Galvin, secretary of the Commonwealth of Massachusetts, told the magazine. ‘I’m concerned because it suggests that there is something systemically wrong with the options trading on this stock.’

January 26 – Bloomberg (Justina Lee): “Short traders in the American stock market are taking a historic pounding as the retail crowd charges into the most-hated names on Wall Street. The 50 most-shorted companies on the Russell 3000 Index have now surged 33% so far this year, with the Goldman Sachs… basket set for its best month since at least 2008.”

January 27 – Bloomberg (Katherine Greifeld): “There are dozens of ways to pick stocks, but few have been as unconventional -- or as successful -- as the coordinated short-squeeze being deployed by Reddit’s army of day traders. Now, Wall Street is scanning for which of the market’s most-hated shares could be targeted next. It’s simple, though not necessarily intuitive: identify a company with huge levels of short interest, and pile in.”

January 27 – Bloomberg (Yakob Peterseil): “Stock volatility is making a comeback amid worries about tech profits, unhinged retail trading and tepid economic growth. The Cboe Volatility Index, known as the VIX, jumped to 37 on Wednesday -- the biggest one-day move since the pandemic-spurred market crash in March. The gauge was trading at 31 as of 7:24 a.m. New York time on Thursday, near the highest since November.”

January 25 – Bloomberg (Cecile Gutscher and Sam Potter): “Across Wall Street, signs of speculative excess are everywhere. Penny stocks surging. Cash pouring into trendy thematic bets. Risky debt paying less than ever. With unchecked animal spirits and historic valuations, what’s an investor to do? Keep buying, apparently. Exchange-traded U.S. equity funds took in $7 billion last week, led by strategies tracking the hottest themes from solar power to robotics. The S&P 500 rose 1.9% in its best week since November, while technology shares -- dubbed the world’s second-most crowded trade -- hit records again. It’s all spurring the likes of Citigroup Inc. and JPMorgan... to warn of market excess in everything from blank-check companies to cryptocurrencies. Yet as fresh stimulus beckons, Wall Street firms are telling money managers to stay largely invested in rallying stock benchmarks.”

Global Bubble Watch:

January 25 – Bloomberg (Enda Curran and Chris Anstey): “In Hong Kong, crypto-trader Sam ­Bankman-Fried stole naps on his office beanbag to get through 18-hour days as demand surged for digital assets. At an auction in Wellington, Darryl Harper pronounced the New Zealand housing market ‘ferocious’ as he brought the hammer down on homes going for hundreds of thousands of dollars above their official valuations. In Makati City, the Philippines, AC Energy Corp. CFO and Treasurer Corazon Dizon was overwhelmed by the appetite for a $300 million green bond. And in Midtown Manhattan, hedge fund manager David Einhorn marveled over a job application from a 13-year-old who claimed he’d quadrupled his money. A common thread runs through these scenes from the plague year 2020: Cheap money, gushing in from the world’s major central banks, inflated assets and reshaped how we save, invest, and spend. And that’s not the end of it. Unlike past recoveries, when investors had no clarity on when the monetary taps would be tightened, this time officials have explicitly said they’re going to stick to their loose policies well into a post-Covid recovery.”

January 26 – Financial Times (Nikou Asgari, Joe Rennison, Philip Stafford, and Hudson Lockett): “Companies have raised $400bn in funds in the first three weeks of 2021 as the torrent of government and central bank stimulus to rescue global economies cascades across capital markets. The global bond and equity fundraising spree marks one of the biggest hauls of the past two decades for the comparable period and is about $170bn above the average for this time of year… ‘The only thing that matters to markets is global fiscal and monetary policy,’ said John McClain, portfolio manager at Diamond Hill Capital Management. ‘Markets are priced as though coronavirus doesn’t matter any more.’”

January 28 – Financial Times (Tommy Stubbington and Colby Smith): “When Saudi Arabia announced it would sell $5bn of international bonds this week, investors scrambled for a piece of the action. The gulf nation drew in about $20bn of orders for its 12- and 40-year bonds… Governments and companies in the developing world have sold a record $115.23bn of international bonds in the first 27 days of 2021, surpassing the previous all-time monthly high of $112.78bn set last January… ‘For all intents and purposes, this is a tsunami we’re facing now,’ said Sergey Goncharov, an emerging markets portfolio manager at Vontobel Asset Management.”

January 25 – Washington Post (David J. Lynch): “One year after the coronavirus pandemic first disrupted global supply chains by closing Chinese factories, fresh shipping headaches are delaying U.S. farm exports, crimping domestic manufacturing and threatening higher prices for American consumers. The cost of shipping a container of goods has risen by 80% since early November and has nearly tripled over the past year, according to the Freightos Baltic Index.”

January 24 – Bloomberg (Ron Bousso): “Top oil and gas companies sharply slowed their search for new fossil fuel resources last year…, as lower energy prices due to the coronavirus crisis triggered spending cuts. Acquisitions of new onshore and offshore exploration licences for the top five Western energy giants dropped to the lowest in at least five years, data from Oslo-based consultancy Rystad Energy showed.”

Social, Political and Environmental Instability Watch:

January 25 – Reuters (Yereth Rosen): “Earth’s ice is melting faster today than in the mid-1990s…, as climate change nudges global temperatures ever higher. Altogether, an estimated 28 trillion metric tons of ice have melted away from the world’s sea ice, ice sheets and glaciers since the mid-1990s. Annually, the melt rate is now about 57% faster than it was three decades ago, scientists report in a study… in the journal The Cryosphere. ‘It was a surprise to see such a large increase in just 30 years,’ said co-author Thomas Slater, a glaciologist at Leeds University in Britain.”

Biden Administration Watch:

January 25 – Bloomberg (Jordan Fabian): “President Joe Biden will escalate appeals for Congress to back his top priority, $1.9 trillion in pandemic relief, seeking to overcome Republican opposition to the plan as he enters his first full week in office. Biden’s top economic adviser, Brian Deese, spent more than an hour on Sunday discussing the proposal with a bipartisan group of lawmakers. Some asked the White House to further justify what would be the second-largest emergency spending measure in U.S. history and expressed interest in a much narrower bill focused on accelerating coronavirus vaccine distribution…”

January 25 – Financial Times (Alexandra Alper and Jarrett Renshaw): “U.S. President Joe Biden said on Monday that he is open to negotiating the eligibility requirements of his proposed $1,4000 COVID stimulus check, a nod to lawmakers who have said they should be more targeted to lower-incomes.”

January 28 – Reuters (Doina Chiacu and Susan Heavey): “U.S. Senator Bernie Sanders urged the Senate… to move forward with a reconciliation process that would make it easier to pass a large coronavirus economic relief bill. ‘If Democrats are to address the enormous crises facing working people, and keep faith with the campaign promises we made, we must go forward aggressively with the Senate reconciliation process. There is no alternative. Now is the time for bold action,’ Sanders said…”

January 26 – Bloomberg (Eric Martin): “The U.S. must take ‘aggressive’ steps to combat China’s ‘unfair’ trade practices while also investing to bring manufacturing back to the country, said Gina Raimondo, President Joe Biden’s nominee for Commerce secretary. Raimondo pledged to respond to Chinese policies that hurt American workers… The new administration will take time to review policies carried over from former President Donald Trump, including tariffs, she said. ‘China has clearly behaved in ways that are anti-competitive -- dumping cheap steel and aluminum into America, which hurts American workers and hurts the ability of our companies to compete,’ Raimondo, who has served as governor of Rhode Island since 2015, said…”

January 23 – Bloomberg (Jennifer A. Dlouhy): “Hours after taking office, President Joe Biden made good on a campaign promise to cancel the Keystone XL oil pipeline. Later that day his Interior Department mandated that only top agency leaders could approve new drilling permits over the next two months. Next week, according to people familiar with the plans, Biden will go even further: suspending the sale of oil and gas leases on federal land, where the U.S. gets 10% of its supplies.”

Federal Reserve Watch:

January 27 – Bloomberg (Matthew Boesler): “Federal Reserve Chair Jerome Powell sidestepped several questions about the one thing virtually all of Wall Street is buzzing about: the market implications of GameStop Corp.’s meteoric rise. Powell refused to comment on any individual stock or a single-day move in the equity market, saying instead that financial-stability vulnerabilities overall are ‘moderate.’ The Fed chair added that the outlook for vaccines and expectations for additional fiscal stimulus have been the main drivers of soaring asset prices in recent months, even though monetary policy does play a role. ‘If you look at what’s really been driving asset prices, really in the last couple of months, it isn’t monetary policy,’ Powell said… ‘The connection between low interest rates and asset values is probably something that’s not as tight as people think.’”

January 28 – CNBC (Patti Domm): “Some market pros see the frenzied short squeezes in GameStop and other stocks as signs of a bubble brewing, but the Federal Reserve doesn’t seem to and for that reason investors expect asset prices could continue to rise. Fed Chairman Jerome Powell… was asked about the potential of Fed policy to fuel bubbles in markets and housing. Powell explained that the Fed has had to use its extraordinary policy to help the economy with still more than 9 million people out of work. ‘It’s very much appropriate that monetary policy be accommodative,’ he said. Powell also said with regard to financial stability, the Fed considers asset prices, leverage in the banking system and nonbanking system, as well as funding risk. ‘I would say financial stability vulnerabilities are overall moderate,’ he said… He said he believes the run-up in housing prices is temporary, and the pandemic has created a surge in demand because of people working from home.”

January 27 – Bloomberg (Matthew Boesler and Steve Matthews): “Federal Reserve Chair Jerome Powell made clear the U.S. central bank was nowhere near exiting massive support for the economy during the ongoing coronavirus pandemic… The central bank’s policy-making body repeated it would maintain its bond-buying program at the current pace of $120 billion of purchases per month until ‘substantial further progress’ toward its employment and inflation goals has been made. It made no changes to the composition of purchases. Powell told a press conference… that it would take ‘some time’ to achieve the threshold for altering asset purchases, making clear the central bank was not close to dialing them back. ‘The whole focus on exit is premature,’ he said…”

January 27 – Axios (Courtenay Brown): “Federal Reserve chairman Jerome Powell told reporters… that rock-bottom interest rates aren't playing a role in driving stock prices higher, while noting that vulnerabilities to the financial system are ‘moderate.’ Why it matters: The statement comes amid unshakeable stock prices and a Reddit-fueled market frenzy — prompting widespread fears of a bubble and the role monetary policy has played in that. What he's saying: ‘What’s been driving asset prices isn't monetary policy. Expectations about vaccines and fiscal policy — those are the news items that have driven asset values in recent months,’ Powell said… ‘The connection between low interest rates and asset values is not as tight as people think,’ Powell said… Powell refused to comment directly on GameStop, which has been at the center of the high-flying stock mania.”

January 27 – Associated Press (Christopher Rugaber and Martin Crutsinger): “Chair Jerome Powell said… the Federal Reserve will keep pursuing its low-interest rate policies until an economic recovery is well underway, acknowledging that the economy has faltered in recent months… Powell made clear his belief that the economy will struggle in the coming weeks and months, until widespread vaccinations and government rescue aid eventually fuel a sustained rebound. ‘We’re a long way from full recovery,’ he said. ‘Something like 9 million people remain unemployed as a consequence of the pandemic. That’s as many people as lost their jobs at the peak of the global financial crisis and the Great Recession.’ The Fed statement warned that the virus is posing risks to the economy.”

U.S. Bubble Watch:

January 26 – Bloomberg (Alex Tanzi and Catarina Saraiva): “The end of 2020 brought the sharpest rise in the U.S. poverty rate since the 1960s… Economists Bruce Meyer, from the University of Chicago, and James Sullivan of the University of Notre Dame found that the poverty rate increased by 2.4 percentage points during the latter half of 2020… That percentage-point rise is nearly double the largest annual increase in poverty since the 1960s. This means an additional 8 million people nationwide are now considered poor. Moreover, the poverty rate for Black Americans is estimated to have jumped by 5.4 percentage points, or by 2.4 million individuals.”

January 28 – Reuters (Lucia Mutikani): “The U.S. economy contracted at its deepest pace since World War Two in 2020 as the COVID-19 pandemic depressed consumer spending and business investment, pushing millions of Americans out of work and into poverty… Gross domestic product decreased 3.5% in 2020, the biggest drop since 1946… That followed 2.2% growth in 2019 and was the first annual decline in GDP since the 2007-09 Great Recession.”

January 28 – CNBC (Jeff Cox): “After a year in which a pandemic and politics posed challenges unlike the U.S. has seen in generations, the economy closed 2020 in fairly good shape. Gross domestic product, or the sum of all goods and services produced, increased at a 4% pace in the fourth quarter, slightly below the 4.3% expectation… Also Thursday, the Labor Department reported that first-time claims for jobless benefits totaled 847,000 last week, less than the 875,000 expected…”

January 26 – CNBC (Diana Olick): “The surge in home prices is not slowing down, thanks to high buyer demand and a record low supply of homes for sale. Prices nationally rose 9.5% in November, compared with November 2019, according to the S&P CoreLogic Case-Shiller… That is the strongest annual growth rate in over six years… It also ranks as one of the largest annual gains in the more than 30-year history of the index. The 10-city composite annual increase in prices was 8.8%, up from 7.6% in October. The 20-city composite showed a 9.1% year-over-year gain, up from 8.0% in the previous month.”

January 28 – Zillow (Matt Speakman): “Despite missing expectations somewhat in December –posting a solid number, but off slightly from highs hit earlier in the year — 2020 will still go down as the best year for new home sales since 2006… New home sales totaled 842,000 (SAAR) in December, up 1.6% from November and 15.2% year-over-year… Overall, an estimated 811,000 new single-family homes were sold in 2020, up almost 20% from 2019. The median sales price of new houses sold in December was $355,900, up 8% year-over-year.”

January 24 – Wall Street Journal (Bob Tita): “A quicker-than-expected recovery in U.S. manufacturing is resulting in supply disruptions and higher costs for materials used in everything from kitchen cabinets to washing machines to automobiles. Consumers unable to spend on vacations, dining out and concerts instead have opened their wallets for appliances and other improvements to their… homes. Car sales also rebounded faster than expected… As a result, prices for some industrial commodities used in those products, such as steel and copper, have climbed to their highest levels in years.”

January 22 – Wall Street Journal (Karen Langley): “Public companies have been taking advantage of a hot stock market by issuing shares at record pace in January. U.S.-listed companies have conducted 80 follow-on stock offerings this year through Friday, raising $16.35 billion. Both numbers are records for this point in the year, according to Dealogic…”

January 25 – Reuters (Caroline Valetkevitch and Stephen Culp): “U.S. corporate share buyback levels are slowly increasing after last year’s pandemic-driven drop-off in spending… S&P Dow Jones Indices projects share repurchases for S&P 500 companies to have totaled about $116 billion in the fourth quarter of last year, up from $102 billion in the third quarter. That’s still far below the $182 billion in the 2019 fourth quarter, and the record $223 billion in the last quarter of 2018. S&P 500 buybacks are projected to rise to $651 billion in 2021 from an estimated $505 billion last year, based on S&P’s data.”

January 24 – Wall Street Journal (Orla McCaffrey): “A promising sign of a bounce back in the pandemic-ravaged economy has stalled: Fewer borrowers are resuming mortgage payments. The proportion of homeowners postponing mortgage payments had been falling steadily from June to November… But the decrease has largely flattened since November… For roughly the past two months, that group of homeowners has flatlined at about 5.5%, according to the Mortgage Bankers Association.”

January 26 – Bloomberg (Jeremy Hill and Katherine Doherty): “Cheap funding costs have extended a lifeline to many troubled companies, slowing the pace of U.S. bankruptcy filings, but shops, offices and hotels have been particularly vulnerable to the pandemic this month. The real estate industry is ‘facing an existential crisis of what’s next,’ said Sarah Borders, a partner focused on restructuring at law firm King & Spalding. She expects pressure to remain on retail as more shopping happens online and says office real estate will suffer as employees delay a return to work.”

January 26 – Wall Street Journal (Will Parker and Peter Grant): “The apartment business has weathered the Covid-19 pandemic better than most of the real-estate sector. That is starting to change. Owners of multifamily buildings are falling behind on loan payments. Banks view a greater number of rental loans as high risk, and fewer lenders are available to help struggling developers with financing. Eviction protections, lower rent collections and unprecedented declines in the asking rent in some urban markets are also taking their toll on apartment owners… During the pandemic, the share of total apartment debt that banks place into their highest-risk categories has ballooned to 16.9% from 4.6%, according to… Trepp LLC…”

January 28 – CNBC (Lauren Thomas): “One retail research and advisory group predicts as many as 10,000 stores could be closed in the United States this year, which would set a new record… The 10,000 closures would represent a 14% uptick from 2020 levels, Coresight Research said…”

Fixed Income Watch:

January 25 – Bloomberg (Carolina Gonzalez): “U.S. junk bond sales set a new January record as low yields allow companies to sell bonds at a breakneck pace. NGL Energy Partners LP took supply over the edge to $38.045 billion…, while at least six other issuers are expected to price another roughly $1.4 billion by the end of Monday. The previous record was set last year at $37.2 billion.”

January 25 – Bloomberg (Christopher Maloney): “The Fannie Mae 30-year 2.5% mortgage bond TBA, or forward settling mortgage-backed securities, hit a fresh record high… Lower supply… and Federal Reserve buying have helped boost the coupon’s price, which touched 105-15+ Monday…”

January 26 – Bloomberg (Amanda Albright and Anastasia Bergeron): “The record high valuations in the municipal-bond market have put some investors in an unusual position: rooting for a surge in supply that would push down prices. With new cash pouring into mutual funds and a steep slowdown in the pace of new debt sales this month, the yields on 10-year tax-exempt bonds have been hovering around 70% of those on Treasuries. That measure, a key gauge of relative value, hit about 66% in mid-January -- the lowest in at least two decades…”

China Watch:

January 27 – Bloomberg: “China’s central bank is winning the battle against leverage, yanking billions of funds from the financial system and crushing a popular trade in the bond market. The People’s Bank of China drained a net 150 billion yuan ($23bn) of funds on Thursday…, the largest such amount since October. That adds to its 178 billion yuan withdrawal from the past two days, and comes after the central bank unexpectedly mopped up medium-term liquidity earlier this month. The moves have dried up activity in the country’s repo market, with the overnight rate seeing few quotes as of 3 p.m. Thursday. Traders said lenders were unwilling to offer large loans to each other, while non-bank financial institutions charged high rates. Some brokers offered overnight funds at a cost of 10% and seven-day cash at 5%, said the traders, who asked to not be named as they are not authorized to comment on the money market.”

January 27 – Reuters (Winni Zhou and Andrew Galbraith): “One of China’s key short-term money rates surged to a near six-year high on Wednesday as investors worried that policymakers may be starting to shift to a tighter stance to cool gains in share prices and property markets. Unlike the past few years, the central bank has not been making net liquidity injections into the banking system to meet strong demand for cash heading into the long Lunar New Year holiday. In fact, it has been draining funds, catching traders by surprise. The holiday starts on Feb. 11 this year. On Wednesday, the volume-weighted average rate of China’s benchmark overnight repurchase agreements, or repo, traded in the interbank market climbed to 2.9930% in afternoon trade, up 21.84 basis points on the day and the highest since April 1, 2015.”

January 26 – Financial Times (Thomas Hale and Hudson Lockett): “Stocks across China dropped after the central bank tightened financial conditions and an official raised concerns that loose liquidity could inflate an asset bubble… Local media reports… cited comments from Ma Jun, an adviser to the People’s Bank of China, telling a wealth management forum that the risk of asset bubbles would increase if the central bank did not adjust its policy. ‘Whether this situation will intensify in the future depends on whether monetary policy is appropriately changed this year,’ he said. He added that if not, such problems would ‘certainly continue’ and lead to ‘greater economic and financial risks in the medium- and long-term’.”

January 26 – Bloomberg (Richard Frost): “A chill swept through Chinese financial markets after the central bank withdrew cash from the banking system and an official warned about asset bubbles… While Tuesday’s withdrawal was small in isolation, it added to signs that Beijing is growing wary of how cheap and plentiful liquidity has stoked excess in markets. PBOC adviser Ma Jun told local media that risks of asset bubbles -- such as in the stock or property market -- will remain if China doesn’t shift its focus toward job growth and inflation management instead.”

January 25 – Bloomberg: “The People’s Bank of China will seek to balance supporting economic growth and curbing emerging risks, Governor Yi Gang said, signaling a continuation of the central bank’s existing policy stance. ‘Going forward, China’s monetary policy will, on one hand, adjust to new economic developments in a timely manner, and on the other hand maintain policy stability to avoid a policy cliff,’ the central bank chief said… He added that ‘China will try to maintain normal monetary policy for as long as possible and keep our yield curve upward sloping.’”

January 26 – Bloomberg: “China’s central bank won’t exit ‘prematurely’ from its supportive monetary policies while at the same time keeping debt risks under control, Governor Yi Gang said. Monetary policy will continue to ‘prop up the economy,’ Yi said… Officials will remain mindful of risks, such as a rising macro leverage ratio and higher non-performing loans, he said. ‘Looking forward, I think our monetary policy will continue,’ he said. ‘We will keep a delicate balance between supporting the economic recovery, at the same time, preventing risk,’ he said.”

January 26 – Bloomberg: “China’s recovery picked up speed this month, putting it further ahead of rivals after recent data showed it was likely the only major economy to have grown in 2020. An aggregate index combining eight early indicators tracked by Bloomberg increased by one step from last month, led by strong performances in exports, property and the stock market.”

January 26 – Financial Times (Thomas Hale): “Even as China’s economy grew faster in December than before the coronavirus pandemic struck, the country’s property market struck a more downbeat tone. While new home prices across the country’s biggest cities rose 3.7% last month compared with a year earlier, the pace of growth was the slowest since early 2016 and prices were up only marginally from November. The data were a signal of the success of new government measures designed to cool the market and curtail developers… ‘The government doesn’t want property prices to keep rising and rising,’ said a researcher at a state-run think-tank, adding that continuous increases were ‘politically not acceptable’.”

January 27 – Bloomberg: “In a four-year campaign to root out risks to China’s financial system, regulators have set upon their biggest target yet: the world’s largest financial technology sector. All three financial watchdogs have made it their primary goal this year to curb the ‘reckless’ push of technology firms into finance, taking aim at a sector where loose oversight fueled breakneck growth… They have the green-light from President Xi Jinping, who in November called on regulators to ‘dare to’ master their supervisory role. The coordinated onslaught guarantees a shakeup among the country’s more than 7,000 micro lenders.”

January 24 – Wall Street Journal (Paul Hannon and Eun-Young Jeong): “China overtook the U.S. as the world’s top destination for new foreign direct investment last year, as the Covid-19 pandemic amplifies an eastward shift in the center of gravity of the global economy. New investments by overseas businesses into the U.S., which for decades held the No. 1 spot, fell 49% in 2020, according to U.N. figures…”

Central Bank Watch:

January 26 – Bloomberg (Steven Arons, Boris Groendahl and Nicholas Comfort): “The European Central Bank is stepping up its scrutiny of credit risk at banks across the continent to get a better sense of their preparation for a potential wave of loan defaults triggered by the pandemic. Officials from the ECB and national watchdogs are pushing lenders… for additional information on their corporate lending in 2020… It’s part of an effort to ensure that lenders can withstand a possible surge of defaults…”

EM Watch:

January 27 – Financial Times (Laura Noonan and Colby Smith): “The IMF has warned that emerging markets’ limited access to Covid-19 vaccines poses a risk to global financial stability… ‘Inequitable distribution of vaccines risks exacerbating financial vulnerabilities, especially for frontier market economies,’ the IMF wrote… Emerging market assets have been boosted by record inflows in the first weeks of the year. But Tobias Adrian, head of the IMF’s capital markets division, said there was a risk that ‘virus infections get worse in emerging markets as vaccines are not rolled out as quickly’.”

January 28 – Wall Street Journal (Anna Hirtenstein): “Developing economies borrowed at a blistering pace at the start of the year after a record 2020… Governments and companies in developing countries have sold close to $100 billion of bonds so far in January…, according to… Dealogic. In all of 2020, they borrowed $847 billion. ‘We’ve never seen a busier start, in terms of issuance year to date—by a large margin,’ said Stefan Weiler, a regional head of emerging-debt capital markets at JPMorgan. ‘From an issuer perspective, it’s hard to see market conditions improving.’”

January 29 – Reuters (Dave Graham and Abraham Gonzalez): “Mexico’s economy last year suffered its biggest annual contraction since the 1930s, although it recovered better than expected from the impact of the COVID-19 pandemic during the final quarter… Gross domestic product (GDP) in Latin America’s second-biggest economy shrank by 8.5% last year…”

January 29 – Reuters (Jamie McGeever): “Brazil’s national debt and public sector deficit ended last year at record highs, central bank figures showed on Friday, while a steep decline in official borrowing costs pushed interest payments as a share of the economy to historic lows. As the COVID-19 pandemic decimated Brazil’s public finances over the course of the year, government debt in December reached 89.3% of gross domestic product, more than economists had expected and the highest level on record.”

January 26 – Associated Press (Sheikh Saaliq): “Tens of thousands of farmers marched, rode horses and drove tractors into India’s capital on Tuesday, breaking through police barricades to storm the historic Red Fort — a deeply symbolic act that revealed the scale of their challenge to Prime Minister Narendra Modi’s government. As the country celebrated Republic Day, the long-running protest turned violent, with farmers waving farm union and religious flags from the ramparts of the fort…”

Europe Watch:

January 26 – Financial Times (Guy Chazan): “Europe risks failing in its mission to boost its growth prospects via the €750bn coronavirus recovery fund, Germany’s former finance minister has warned, as he questioned whether member states had the capacity to implement tough economic reforms. ‘There is a lack of real progress, a lack of efficiency in the execution of [reform programmes] in the member states,’ Wolfgang Schäuble told the Financial Times. ‘These difficulties worry me.’”

January 26 – Reuters (Angelo Amante and Gavin Jones): “Italian Prime Minister Giuseppe Conte handed in his resignation to the head of state on Tuesday, hoping he would be given an opportunity to put together a new coalition and rebuild his parliamentary majority… Hours after resigning Conte made a new impassioned appeal for support, posting on Facebook that he wanted to build a government of ‘national rescue’ with a broader and more secure majority. ‘It is time for the voices to emerge in parliament of those who have in their hearts the future of the republic,’ he said.”

January 25 – Bloomberg (Alessandra Migliaccio and Chiara Albanese): “The Italian Treasury is starting to factor in a bigger hit to the country’s battered public finances this year as another extended lockdown holds back the recovery, a senior government official said. Treasury models suggest the budget deficit may reach as much as 9.2% of output this year…”

January 27 – Bloomberg (Michael Nienaber): “The German government… slashed its growth forecast for Europe’s largest economy to 3% this year, a sharp revision from last autumn’s estimate of 4.4%, caused by a second coronavirus lockdown.”

Japan Watch:

January 25 – Reuters (Ritsuko Ando): “Prices of newly-built apartments in the Tokyo area rose 1.7% last year, approaching the record highs seen during Japan’s asset-inflated bubble era that ended in the early 1990s…”

Leveraged Speculation Watch:

January 25 – Bloomberg (Katherine Burton): “Hedge fund titans Ken Griffin and Steve Cohen boosted Gabe Plotkin’s Melvin Capital, injecting a total of $2.75 billion into the firm after it lost about 30% this year. Citadel funds and firm partners will invest $2 billion, while Point72 Asset Management’s investment will be $750 million… In return, the investors will get a non-controlling revenue share in the six-year-old hedge fund. Melvin Capital may receive an additional $1 billion infusion from other investors on Feb. 1… The capital infusion comes after Melvin Capital, which started the year with about $12.5 billion in assets, has seen its short bets, including GameStop Corp., go awry, spurring the losses, people familiar with the firm said.”

January 28 – Financial Times (Ortenca Aliaj, Colby Smith, Eric Platt and Michael Mackenzie): “Hedge funds have scaled back the size of their bets in the stock market in recent days after volatility caused by groups of amateur traders pushed up shares in companies such as GameStop and inflicted heavy losses on some high-profile firms. The unwinding of positions has been noted by brokers and may have contributed to the sharp moves in some shares… Morgan Stanley said… Monday and Tuesday were among the top five heaviest days for so-called de-grossing over the past decade.”

January 27 – Bloomberg (Zeke Faux, Hema Parmar and Katherine Burton): “Maplelane Capital, a $3.5 billion stock hedge fund, lost about 33% this month through Tuesday in part because of a short position on GameStop Corp., according to investors.”

January 28 – Bloomberg (Hema Parmar and Melissa Karsh): “Viking Global Investors, Andreas Halvorsen’s $44 billion firm, is down about 7% so far this year in its hedge fund, according to a person familiar with the matter.”

January 24 – Reuters (Svea Herbst-Bayliss): “The world’s 20 best-performing hedge funds earned $63.5 billion for clients in 2020, setting a record for the last 10 years during a chaotic time when technology oriented stocks led a dramatic rebound from a pandemic induced sell-off, LCH Investments data show. As a group, the most successful managers earned half of the $127 billion that all hedge funds made last year…”

January 27 – Bloomberg (Kit Rees): “Some of Europe’s most-shorted stocks surged again on Wednesday, led by Evotec SE and Pearson Plc, in an echo of a similar rally in the U.S., where retail investors have battled against short sellers by piling into names like GameStop Corp.”

Geopolitical Watch:

January 27 – Reuters (Tony Munroe and Yew Lun Tian): “China toughened its language towards Taiwan on Thursday, warning after recent stepped up military activities near the island that ‘independence means war’ and that its armed forces were acting in response to provocation and foreign interference… Chinese Defence Ministry spokesman Wu Qian said Taiwan is an inseparable part of China. ‘The military activities carried out by the Chinese People’s Liberation Army in the Taiwan Strait are necessary actions to address the current security situation in the Taiwan Strait and to safeguard national sovereignty and security,’ he said. ‘They are a solemn response to external interference and provocations by ‘Taiwan independence’ forces,’ he added… ‘We warn those ‘Taiwan independence’ elements: those who play with fire will burn themselves, and ‘Taiwan independence’ means war,’…”

January 29 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “Chinese military aircraft simulated missile attacks on a nearby US aircraft carrier during an incursion into Taiwan’s air defence zone three days after Joe Biden’s inauguration, according to intelligence from the US and its allies… Pilots of H-6 bombers could be heard in cockpit conversations confirming orders for the simulated targeting and release of anti-ship missiles against the carrier, the people said. The revelations highlight that the intense military competition between the two superpowers around Taiwan and the South China Sea has not eased…”

January 25 – Reuters: “China said… it will conduct military exercises in the South China Sea this week, just days after Beijing bristled at a U.S. aircraft carrier group’s entry into the disputed waters. A notice issued by the country’s Maritime Safety Administration prohibited entry into a portion of waters in the Gulf of Tonkin to the west of the Leizhou peninsula in southwestern China from Jan. 27 to Jan. 30, but it did not offer details on when the drills would take place or at what scale.”

January 25 – Reuters (Yimou Lee): “Armed and ready to go, Taiwan air force jets screamed into the sky on Tuesday in a drill to simulate a war scenario, showing its fleet’s battle readiness after dozens of Chinese warplanes flew into the island’s air defence zone over the weekend. Taiwan… has been on edge since the large-scale incursion by Chinese fighters and nuclear-capable bombers into the southwestern part of its air defence identification zone on Saturday and Sunday, which coincided with a U.S. carrier group entering the South China Sea.”

January 24 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “The US has urged China to stop intimidating Taiwan after Chinese fighter jets and bombers flew into the country’s air defence zone, in the second warning to Beijing since Joe Biden became US president… ‘We urge Beijing to cease its military, diplomatic and economic pressure against Taiwan and instead engage in meaningful dialogue with Taiwan's democratically elected representatives,’ the US state department said.”

January 25 – Axios (Dave Lawler): “Chinese President Xi Jinping warned that a ‘new cold war’ could turn hot, and must be avoided, in a speech… to at World Economic Forum’s virtual ‘Davos Agenda’ conference… ‘We should respect and accommodate differences, avoid meddling in other countries’ internal affairs and resolve disagreements through consultation and dialogue. History and reality have made it clear time and again that the misguided approach of antagonism and confrontation — be it in the form of a cold war, hot war, trade war or tech war — will eventually hurt all countries’ interest and undermine everyone’s well-being.’”

January 24 – Reuters (Yuka Obayashi): “New U.S. Defense Secretary Lloyd Austin, during his first phone call with his Japanese counterpart, reaffirmed America’s commitment to Tokyo to defending a group of East China Sea islets claimed by both Japan and China, the Pentagon said.”

January 27 – Bloomberg (Stepan Kravchenko and Ilya Arkhipov): “Russian President Vladimir Putin said the world risks sliding into an ‘all against all’ conflict amid tensions caused by the Covid-19 pandemic and growing economic inequality. Addressing the World Economic Forum… for the first time in 12 years, Putin drew parallels with the 1930s when he said a failure to resolve international problems sparked World War II. ‘Today, such a global hot conflict is, I hope, in principle impossible,’ Putin said… ‘But, I repeat, the situation can develop unpredictably and uncontrollably.’”

Friday Afternoon Links

[CNBC] Dow falls below 30,000, tumbles 700 points amid concern about the GameStop retail trading

[Yahoo/Bloomberg] GameStop Rally Reignites as Retail Traders Step Back In

[CNBC] Covid live updates: U.S. facing drug shortage as pandemic dents December consumer spending

[Yahoo/Bloomberg] Biden Revokes Oil Drilling Permits for Additional Review

[Yahoo/Bloomberg] Wall Street’s Bounty Hunter Abandons Short Selling Research

[Bloomberg] SEC Says It’s Probing Market Mania for Potential Misconduct

[Bloomberg] Why Robinhood and Other Brokerages Restricted Trading This Week