Macro Tides Weekly Technical Review – January 25th 2021
The Spell of Money
St. Patrick’s Day is still 51 days away but penny stock speculators, call option traders, and institutional money managers can only see green. The Federal Reserve will continue to expand its balance sheet by $120 billion a month with its purchases of $80 billion of Treasury bonds and $40 billion of Mortgage Backed Securities as far as the eye can see. Congress has already authorized more than $3 trillion in fiscal stimulus and may add another $1.9 trillion in coming weeks. Penny stock buyers are being rewarded with huge gains, call option buyers on high priced stocks are doubling their stimulus payments, dealers are forced to buy the underlying shares to hedge their short call positions, and down and out cyclical stocks have rewarded value oriented institutional money managers
with huge gains since November 9. Mesmerized by the success of these investment strategies any negative news is ignored as the narrative of a strong second half rebound evokes the allure of a Roaring Twenties Boom just over the horizon.
A good example of the ramp up in speculation was highlighted by the Wall Street Journal’s coverage of GameStop on January 25, which has soared from under $20.00 a share on January 12 to $159.00 on January 25.
Some of the meteoric rise can be attributed to a large short position in GameStop after revenues had fallen for the last four years and the purchase of call options by small traders. One of the key points is that Chat Rooms are providing small traders the platform to target and manipulate individual stocks. The Chat rooms of today are not much different from the Stock Pools that developed during the Roaring 20’s stock rally that gradually pulled more of the public into speculating in the stock market with 50% margin. Operators of stock pools took in public money and then used it to manipulate individual stocks. After the 1929 Crash and the investigations that followed, the manipulation by stock pools and other abuses led to the formation of the Securities and Exchange Commission. Ironically the SEC was initially led by Joseph Kennedy who had operated a stock pool himself.
A boom in the second half of 2021 is dependent on containment of COVID-19 and all of its variants, which could prove more difficult than presumed. The British variant is known to be 50% more infectious but was initially thought to be less deadly. Over the weekend it was announced that the British variant is likely more deadly. The British variant has already been found in 20 U.S. cities and could become the dominant strain in some of these cities within the next six weeks. Although the current vaccines will be effective against the British variant, the efficacy may be less according to Dr. Fauci. Of greater concern is the South African variant which is already known to be more infectious and deadly, and its Brazilian cousin. Due to its structure the South African variant is expected to make the current vaccines far less effective.
Those expecting a smooth transition to a second half boom in the U.S. economy simply based on liquidity and fiscal support are overlooking the significant risk that efforts to contain the Pandemic within the next few months may not be completely successful. The rate of vaccinations will improve and President Biden’s goal of vaccinating 100 million people within the next 100 days may be achieved. The wild card is the virus which will continue to mutate in ways that will make the vaccines of today less effective tomorrow. This will require newer versions of existing vaccines, especially if the British or South African variants become dominant in coming months in the U.S. Any meaningful disappointment related to the vaccine or the reopening of the economy in the second half of the year could lead to a quick and sharp decline that brings the S&P 500 down to 3550.
Jim Welsh
