Friday Market Insights – Retail buyers, short covering and momentum buyers drive GameStop to unsustainable level

Ian Lusher: [00:00:06] Welcome, everyone, to January twenty-ninth version of Friday Market Insights. My name is Ian Lusher. I’m a partner and portfolio manager with Genus Capital Management and I’m here with Mike Thiessen, who’s also a partner and the director of Sustainable Investing. So, Mike, we had a little bit of an exciting week. What happened in the markets this week?

Mike Thiessen: [00:00:29] Yeah, this week was was very exciting. A lot going on. The market was down over over three percent this week. The big news that I’m sure everybody has heard about, everybody is talking about it is the GameStop short squeeze. We can get more into that later. So that’s kind of weighing on things. Also, technology companies do have disappointing earnings this week and there’s trade disputes and production issues around the vaccine. So more uncertainty there. People are wondering when when the economy is going to be getting back to kind of the kind of levels when we’re going to be getting over this pandemic. And with all the delays in vaccines, then it seems less certain when that time is going to be.

Ian Lusher: [00:01:09] Right, so given a volatile week, how does it affect Genus clients?

Mike Thiessen: [00:01:14] Yeah, we were we were quite well positioned for a week like this, so for a while we have been very confident in our positions, in in financials, in industrials materials, and we’ve been quite neutral in it. So technology did take a hit this week, but being neutral, it didn’t affect us too much. And of course, we don’t have positions in GameStop. We’re not short selling stocks. So so that part didn’t affect us too much directly, at least. So we didn’t make any major changes, a few little tweaks in the next couple of weeks we’ll do some rebalances. And so there might be some changes there, but I’m not expecting anything major.

Ian Lusher: [00:01:54] Right. So you have brought up the name GameStop twice already. I’ve had four clients this morning asked me about GameStop. I have my mom ask me about GameStop this morning. So GameStop is kind of everywhere. To those of you who don’t know, GameStop is just a store that sells gaming, very popular for the last probably five to 10 years. So can you explain to everybody what exactly this GameStop mania is and how this turns into a basically affects the entire market with increased volatility?

Mike Thiessen: [00:02:30] Yeah, so so it’s been crazy, so the stock went from under 20 dollars at the beginning of January and then it was over four hundred at one point this week at three fifty the last time I looked today. So it’s really just skyrocketed. And so there’s a few factors going into this. One being that a lot of hedge funds, institutions have been short selling their stock. So they’re making money off the stock going down. So that’s that’s one factor. The other factor is retail investors now have a lot more power because they can band together over social media and retail investors can be trading more for for lower cost because commissions have really come down, especially with some really low cost brokers like Robin Hood. And also, you can buy partial stocks now through Robin Hood and some other brokers. So a lot of retail investors have a lot more power than they used to. So when they started buying GameStop, the price starts going up and then momentum traders get into that as well because they see something going up, they get into it. And then a lot of these short sellers, these hedge funds have to have to are cutting their losses because they’re realize, OK, we’re losing some money, let’s cut losses. The way to cut losses if you’re short selling, is that you have to buy back the stock. So they’re buying everything back. And then the third big factor for this is that the float for GameStop is is very small. So that means that the amount of stocks that are out there for GameStop is a small amount. So when you buy GameStop, you can affect the price more than you would potentially with other stocks just because there aren’t as many there’s not the same supply of stocks. So when the short sellers are buying back stocks, it’s shooting everything up. More and then more of these hedge funds are deciding that they want to cut losses. So they’re having to buy back and shooting everything out more. So there’s all these all these different types of investors are wanting to buy the stock for different reasons. And it’s just really shooting everything up. So so that is what that’s what has happened. It’s going to be interesting to see what happens in the next few weeks with this talk, because right now it’s it’s valued more than Blockbuster than the best by certainly more than Blockbuster. And Best Buy has a much larger footprint. They are massively profitable. So it really doesn’t make any economic logical sense. It’s just a technical short squeeze. So it’ll be very interesting to see what happens.

Ian Lusher: [00:05:00] Right. So in short, it’s a younger generation using new technology to boost the price of a company that kind of is doing old school selling. It’s it’s an interesting world we live in. But but that’s what’s happening. So another thing that was causing volatility in the markets this week is some of the vaccine news, a little bit of supply problems, delivery problems with some of the existing ones. And there’s also a new vaccine that’s been talked about quite a bit from Johnson and Johnson. Some people have called it a game changer. Can you explain to me why some people thought it’s a game changer and perhaps some of the results that came out of that study today?

Mike Thiessen: [00:05:44] Sure, well, the Johnson and Johnson vaccine is a single shot vaccine, so that’s really what makes it a game changer. You don’t have to have these two shots which have been where it’s going to be really a logistical nightmare for Pfizer and mature enough to do all these second shots for everyone. It’s already been a nightmare for you’re going to get the first shots, but with the with the danger of vaccine, you don’t have to have that second shot. So that’s great. It’s also better when it comes to production because to immunize a billion people, you just have to produce a billion doses rather than two million doses. So so they’re not going to have the same production issues. Like you talked about, the downside is that the effectiveness of this of this vaccine isn’t as high as these other ones. So it had a sixty six percent effectiveness rate relative to ninety five plus for these other ones. So it’s not as good. But if you do remember, six months, seven months ago when we were talking about potential vaccines, a lot of experts were saying that we hope to find a vaccine that has 50 to 60 percent effectiveness. So that was kind of the threshold back then that they were really wanting. So this does exceed that threshold. It’s just not near as good as these other ones when it comes to effectiveness. And the results have been varied based on different countries and regions, which is which is not great as well. And I have to look into that.

Ian Lusher: [00:07:04] I think the news on Johnson and Johnson, by and large, is good. It’s just not as good as people may have hoped for. We had our Outlook seminar yesterday and we have an excellent question that we weren’t able to get to from Randall. What effect will Biden’s climate initiatives have on our portfolios?

[00:07:25] The Biden initiative is just just to kind of recap what’s going on, so Biden has a two trillion dollar climate plan that he’s that he’s moving forward. It’s intertwined with their economic plan. They have very ambitious goals in various areas. So so they want to install a lot of solar panels around the around the US. I think the goal is five hundred million over the next five years. They’re buying fleets of electric vehicles for federal workers. They’re investing in a lot of different technologies, infrastructure. So this is really a great jumpstart for the US to move to a lower carbon economy. And they have a lot of really strong targets. They signed the Paris agreement, which means that they need to be carbon neutral by 20, 50, but they want their all their energy to be clean energy by twenty, thirty five. And for many of the Genus funds, especially the fossil free funds, we invest in companies that that will do very well in this overall transition. So companies that make components for electric vehicles or for renewable energy or involved in energy efficiency projects, which will be really needed throughout this whole period, they will they will be set up to benefit from a lot of this capital and and new infrastructure that’s being built.

Ian Lusher: [00:08:51] Yeah, good point. I mean, I’ve been reading quite a bit about this and from government initiatives also comes a lot of private activity. We’ve already seen some of that. Well, that’s all we have for this week. Thanks a lot, Mike. Thanks to everybody who was on our Outlook webinar yesterday. If you weren’t, it is available on our website. And thank you all once again for for tuning in to this week’s Friday Market Insights. Have a good weekend.