Timing & trends

Shots Fired

Posted by Jeff Cox

on Friday, 26 February 2021 9:16

 

A Robinhood spokesman fired back at Berkshire Hathaway Vice Chairman Charlie Munger’s criticisms of the free trading app. Munger had said Robinhood was having a “regrettable” impact on investors who have a “mindset of racetrack bettors.” Robinhood criticized the comments as “disappointing and elitist.”

The longtime business partner of Warren Buffett on Wednesday addressed the running controversy over Robinhood and similar applications, noting dangers from the allure of easy, free trading.

“No one should believe Robinhood trades are free,” Munger, 97, said. “The frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers.”

He added that the app has created “a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors. … It’s a dirty way of making money.”

A statement Thursday from Robinhood spokeswoman Jacqueline Ortiz-Ramsay took sharp exception to the remarks.

“In one fell swoop an entire new generation of investors has been criticized and this commentary overlooks the cultural shift that is taking place in our nation today,” Ortiz-Ramsay said. “Robinhood was created to allow people who don’t have access to generational wealth or the resources that come with it to begin investing in the U.S. stock market. To suggest that new investors have a ‘mindset of racetrack bettors’ is disappointing and elitist.”

Both commentaries referred to a recent groundswell among retail investors who are combining the convenience and free trades of Robinhood with viral platforms provided by social media, particularly the Reddit message boards.

In the most glaring example, investors have piled into GameStop, a heavily shorted stock that has seen its price explode higher in recent weeks amid a surge in Robinhood-based trades that created a massive short squeeze.

Though the speculation has created intense market volatility, Robinhood asserted that its product is providing opportunity.

“It should be celebrated that we are seeing market investors begin to diversify, and that education and awareness about the values of investing are diffusing further into previously untapped generations,” Ortiz-Ramsay said.

Munger isn’t the only Robinhood critic – others have accused it of turning stock trading into a dangerous game, from which it benefits through payment for order flow, or the money that market makers give the company for trading volume.

“No one should believe Robinhood trades are free,” Munger said. “The frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers.”

 

Airbnb and DoorDash went public at the same time but see very different paths post-pandemic

Posted by Sara Ashley O'Brien

on Friday, 26 February 2021 9:10

 

(CNN Business)Airbnb and DoorDash went public the same week in early December and were both met with strong demand from investors. But in their first earnings reports as publicly traded companies on Thursday, the two sharing economy businesses signaled very different possible paths forward after the pandemic ends.

In a letter to investors, Airbnb said it is “preparing for the travel rebound” in 2021 after seeing bookings through its platform drop 41% in 2020 as people largely stayed home due to the pandemic.
“As the vaccine is rolled out and restrictions lift, we expect there will be a significant travel rebound,” the company wrote in the letter.
DoorDash, by contrast, has benefited greatly from people ordering food and essential items while staying at home, with revenue of $2.89 billion last year, more than tripling from the year prior. “While the Covid-19 pandemic was a tailwind for all online commerce in 2020, we are proud of the outsized gains we made relative to category peers,” the company said in its letter to investors.
But there’s some cause for concern ahead. While the company said it hopes “markets will begin to open up soon,” it also hinted at a resulting negative impact on its business. DoorDash said that this return to normal could result in “declines in consumer engagement and average order values, though the precise amount remains unclear.”
While shares of Airbnb were essentially flat in after-hours trading Thursday following the earnings report, DoorDash stock fell more than 11%. Both companies remain well above their IPO prices.
For now, both companies continue to face challenges.
Despite strong revenue growth in the fourth quarter, DoorDash’s losses grew, too. It lost $312 million in the quarter, compared to $134 million during the same period a year earlier. The company had turned its first profit — $23 million — in the second quarter of 2020, before reporting losses again in the third quarter.
Airbnb, meanwhile, posted a staggering loss of $3.9 billion in the fourth quarter, with $2.8 billion of that related to stock-based compensation. The company said it lost $4.6 billion in 2020.
In its earnings report, Airbnb focused on the fact that its revenue for the fourth quarter was down “only 22% year-over-year, demonstrating Airbnb’s resilience.” It brought in revenue of $859 million in the fourth quarter, despite surges in coronavirus cases.

Berkshire Hathaway Vice Chairman warns of market ‘frenzy’; frowns on gambling mentality, bitcoin, SPACs

Posted by Jonathan Stempel 2 MIN READ Jonathan Stempel

on Thursday, 25 February 2021 8:30

 

(Reuters) – Charlie Munger, the longtime business partner of Warren Buffett, on Wednesday warned that the stock market bears signs of a bubble, reflecting a “dangerous” mentality among some investors to gamble on stocks as they would horse races.

Munger, 97, lamented the recent mania for GameStop Corp, in which amateur investors encouraged each other online to buy the gaming retailer on platforms including Robinhood, and caught some hedge funds in a short squeeze.

“It’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors,” he said.

“A lot of them crowd in to buying stocks on frenzy, frequently on credit, because they see that they’re going up, and of course that’s a very dangerous way to invest.”

Asked if the market resembled the late-1990s dot-com bubble, Munger said: “Yes, I think it must end badly, but I don’t know when.”

Munger was speaking at the annual meeting of Daily Journal Corp, the Los Angeles newspaper publisher he chairs, which was broadcast on Yahoo Finance.

He is better known as vice chairman of Buffett’s conglomerate Berkshire Hathaway Inc since 1978.

Munger said investors should not buy gold or bitcoin, noting the latter was too volatile to become a “medium of exchange for the world.”

He paraphrased author Oscar Wilde’s quotation about fox hunting to describe bitcoin, calling it “the pursuit of the uneatable by the unspeakable.”

Munger also expressed disdain for the surging demand for special purpose acquisition companies, or SPACs, which raise money from investors and then merge with private companies to take them public, in “blank check” arrangements.

“The world would be better off without them,” Munger said.

“This kind of crazy speculation in enterprises not even found or picked out yet is a sign of an irritating bubble,” he said. “It’s just that the investment banking profession will sell shit as long as shit can be sold.”

The fundamental numbers still don’t make sense

Posted by Chuck Jones

on Thursday, 25 February 2021 7:49

GameStop’s Roller Coaster Ride Resumes

GameStop GME +35.7% had another huge move up on Wednesday after the company announced the CFO was resigning the company. Normally a stock declines when a CFO suddenly departs but GME increased over 100% yesterday, moving from $44.97 to $91.71, an increase of 104%. It continued the move in the after-market, rising $76.29 to $168, up an additional 83%. The market cap at Wednesday’s close was $6 billion and in the after-market was $11 billion.

The Wall Street Journal reported that, “GameStop’s finance chief was forced out of his role as activist investor Ryan Cohen pushes for a digital transformation of the ailing videogame retailer.” In this type of situation it could make sense for a stock to move higher but not to double. Wednesday’s rebound and the follow-through in the after-market is probably being driven by the Reddit crowd. They need to be very wary of another steep rise followed by another sharp fall.

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Schacter’s Eye on Energy – Feb. 24th

Posted by Josef Schachter

on Wednesday, 24 February 2021 13:05

The Arctic Polar Vortex brought near century lows in temperatures last week to most of North America with frigid temperatures that  knocked out electricity grids. Texas was the hardest hit with water, heat, refineries and power out due to the freezing temperatures. It may take a few weeks to get remediation done now that the weather has warmed up and repairs are underway. The price of crude spiked to US$63/b (up one dollar from last week). The data for the next few weeks should see divergences from the norm as these issues take time to be resolved. While natural gas prices have backed off from the cold weather spikes, crude oil remains elevated due to speculative forces pushing up crude oil futures and options.  Some option positions into Q4/21 are positioned for WTI to exceed US$100/b. We see this enthusiasm as nuts. Has the pandemic gone away? Have we had everyone vaccinated who wants one of the vaccines? Has herd immunity arrived?  Are the mutations irrelevant? I do see consistent US$100/b for WTI in the ‘future’ but not until 2024 onward.

Each week Josef Schachter will give you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold newsletter covering the general energy market and 27 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Data: The EIA data on Wednesday February 24th was mixed. Commercial Inventories rose by 1.3Mb on the week compared to a forecasted decline of 5.2Mb/d. The difference was due to demand falling by 1.98Mb/d (13.9Mb on the week) and exports falling by 1.55Mb/d offset by imports falling by 1.30Mb/d. Motor Gasoline Inventories were unchanged while Distillate Inventories fell 5.0Mb due to strong winter demand. Refinery Utilization fell 14.5 points to 68.6% from 83.1% as most of the Texas refinery industry was shut down. US Domestic Crude Production fell by 1.1Mb/d to 9.7Mb/d and is down 3.3Mb/d from last year’s 13.0Mb/d. This level is better than forecast as production has recovered faster than expected.

With many parts of the US shut down last week due to the extreme winter weather Total Product Consumption fell 1.98Mb/d to 18.7Mb/d, Finished Motor Gasoline Consumption fell by 1.2Mb/d to 7.2Mb/d and Jet Fuel consumption fell by 196Kb/d to 979Kb/d. Cushing Oil Inventories rose last week by 2.8Mb. Inventories at Cushing are now at 47.8Mb and are up from 39.1Mb a year ago.

Baker Hughes Rig Data: The data for the week ended February 19th showed the US rig count unchanged despite the freezing weather in Texas, and a decline of four rigs for the Canadian rig count. In the US there were 397 rigs working, but that remains down 50% from 791 rigs working a year ago. The US oil rig count fell by one rig offset by a  one rig increase for natural gas drilling. The Permian saw an increase of one rig to 204 rigs working and remains 50% below last year’s level of 409 rigs working. Canada saw a  decline of four rigs last week with 172 rigs working. This is 30% lower than the 244 rigs active last year. The rig count for oil fell by one rig to 100 rigs working but is down 41% from 169 rigs working last year. The natural gas rig count fell by three rigs to 72 rigs active and is down from 75 rigs working at this time last year. In a few weeks we head into break up season so the rig count will start to fall off sharply as the road bans come on.

Conclusion: WTI crude oil is up almost US$11/b from the start of February.  Of this rally US$8-9/b is due to the infusion of speculative money (from sources like the Robinhood and Reddit novice retail horde) who are buying futures and call options. These horde investors, a gang of over 14M retail investors, are trying to  squeeze the energy Commercials (refiners, petrochemical companies and energy companies etc.) shorts who are short 1.71Bb (the prior week 1.64Bb). Commercials are now net short 621Mb. Historically commercials are right in the end and speculative investors get burned. We see this outcome occurring again once winter is over and world demand for crude falls 2.0-2.5Mb/d.

We believe that there is US$14-16/b of downside risk for WTI as markets begin to reflect the demand situation post-winter, the recovery in US production and OPEC cheating and/or raising approved production levels. We see WTI crude breaching US$50/b in April and going lower thereafter. OPEC meets on March 4, 2021 to ease curbs and are likely to increase production materially to lower Brent and WTI crude prices and not negatively impact the economic recovery or give incentive to the US shale industry to increase production after the winter weather event is over.  Russia and Iraq are the most interested in seeing quota’s raised.

Technically the near-term support level for WTI crude is US$58.60/b. Energy and energy service stocks are very overbought and being chased by hot momentum money. We are clearly in the bear camp now. The most vulnerable companies are energy and energy service companies with high debt loads, high operating costs, declining production, current balance sheet debt maturities of some materiality within the next 12 months and those that produce heavier crude barrels. Results for Q4/20 are now being released and are not strong enough to justify current stock price levels if crude retreats. The cold weather had lifted AECO natural gas to C$5.31/mcf last week but AECO today is down to $2.99/mcf. The NYMEX US price now at US$2.86/mcf is down from US$3.24/mcf  a week ago. The speculative players are not involved in natural gas so we see a major divergence in the price activity between the two commodities.

We now have a SELL signal in place since January 14, 2021. Subscribers of our regular SER service were notified of this on January 14, 2021 and were informed of 14 stocks and the prices at which we think the ideas be harvested. We sent out a second sell signal on February 5th and added four additional ideas for harvesting. We ourselves have sold a large portion of our energy holdings for substantial profits. We sit in cash or defensive positions.  The next few months could see significant downside for the energy sector. The topping process is ongoing and some surprise events will prick this bubble as the GameStop, AMC, cannabis and other bubbles were busted this month.

Energy Stock Market: The S&P/TSX Energy Index now trades at 117 and is part of a lengthy and extended broadening topping process. While we had expected this bubble to burst already, market manias can extend even longer and with crazier valuations than rational expectations would forecast. The S&P/TSX Energy Index is expected to fall substantially in the coming months. A breach of 103.60 should initiate the sharp decline.