Mania in GameStop
and AMC the Most Irrational of Irrational Exuberance Seen So Far
By the Curmudgeon with
Victor Sperandeo
Introduction:
This will be a shorter post than usual as both Victor and I do not want to
rehash what we’ve repeatedly stated for years about
the Fed, ECB and irrational markets. We
are both worn out and fatigued by all the negatives we perceive in America
now. The homeless epidemic in the SF Bay
Area is particularly disturbing to the Curmudgeon.
We briefly comment on the BIG SHORT SQUEEZE before examining the
deteriorating fiscal health of state and local governments in the U.S.
The key question for the states is if any COVID-19 fiscal stimulus package
will provide sufficient aid. If not,
expect layoffs, spending cuts and (possibly) higher state income and/or sales
taxes.
Short Squeeze is Another Warning Sign:
The Fed meeting would normally have been the major focus of the markets
this week. Not even close! The only thing everyone in and out of the
market is talking about is the incredible short squeezes in stocks which have
very unfavorable earnings prospects.
Our take on young amateurs “sticking it to the hedge funds” is that it’s yet another sign of extreme bullishness.
“Rally the troops, my brothers, for the war could be over
very soon,” a commenter who goes by Gardeeon wrote on
Jan. 19th. “You control the power, GME is not going to the moon, but
to the edge of the [expletive] observable universe.”
“What d’ya mean you’re short?
Don’t you know stocks can only go up!!!”
We see this as a classic sign of incredible excess liquidity sloshing
around the markets. Victor describes the markets as being in “never-never
land.” Obviously, it is also a
quintessential display of retail herding behavior as per “Join the message
board crowd or lose out!”
Excess bullishness, excess liquidity and retail herding behavior are all
attributes of exuberance seen at historic stock market tops. For example, the 1929 shoeshine boy asking
for stock tips and the 1998-2000 infatuation with dot com/Internet and fiber
optic stocks.
While we are not calling a market top, we note that The DJI lost 1141
points during the week and that the DJI and S&P closed the first month of
the year lower, with declines of 2.04% and 1.11%, respectively. The NASDAQ
Composite ended the month higher by 1.42%.
State and Local Government Tax Revenues and Budget
Deficits:
Overall state tax revenues in the U.S. declined 4.4% through the first 9
months of 2020. While state and local budget shortfalls weren’t
as bad as feared, economists are concerned many states will be forced to make
spending cuts or raise taxes.
Chart 1. State’s revenues decline
this year (Q1-Q3 of 2020 v Q1-Q3 2019 in %):
Source: Census Bureau
Tax revenue (income, property, sales tax, corporate) only makes up 56% of
state and local governments’ revenues.
The remainder comes from fees ranging from mining, airports,
recreational services, and mass transit—all areas hit hard by the pandemic.
Consequently, states that generate a significant portion of their revenues
from mining and drilling (e.g., Alaska, Texas, Oklahoma) and tourism (e.g.,
Florida, Nevada) have experienced a notable drop in total revenues through 3Q
2020.
The upshot here is that the coronavirus has spared the fiscal positions of
few, if any, states. Aid to state and local governments will be crucial to a
quick recovery.
State Spending Cuts Likely if no Federal Government Aid:
Bank of America economists predict that
without additional federal support, state and local spending could be a drag
on U.S. GDP well after the current COVID-19 induced recession has
ended. That was the case after both the
Dot-Com Boom and Great Financial Recession of 2008 -2009.
Spending cuts will likely concentrated in the local portion of government
for a couple of reasons: 1) states reduced transfers to localities and 2) local
governments tend to run primary and secondary public schools.
The cuts to public education jobs most likely will consist of workers who
have been furloughed, while schools practice more
online learning.
Brookings Institute's latest projections forecast from late-December of
next year shows tax revenues will be down roughly 3.25% from 2019 levels in
2020. If realized, this would imply 2021 state and local employment levels that
are 1.1% lower than equivalent 2019 levels. Hence, the jobs lost during
pandemic would not be recovered. U.S.
GDP will also be reduced unless there’s federal government aid to the states.
Chart 2. Contribution to GDP from State and local
consumption expenditures (%):
Source: BofA Global Research, U.S. BEA
……………………………………………………………………………..
NY Times Quotes on the Short Squeeze:
“Trading like we’re seeing in GameStop is humbling for those of us who hold
onto the quaint idea that capital markets channel investors’ money to its most
efficient and productive uses,” said Tyler Gellasch,
a former Securities and Exchange Commission official who now leads the Healthy
Markets Association, a nonprofit that promotes transparency in financial
markets.
Pablo Batista, 25, traded to
pass time during the lockdown, but has since become more serious as his $4,000
investment in stocks has swelled to more than $67,000. “At this point, I’m like overwhelmed,” he
said of the $11,440 he made trading shares of GameStop on Monday. “It’s
ridiculous. It’s crazy.”
“How does it end? Badly. Eventually, the bigger the balloon, the louder the
pop,” said Steve Sosnick, chief strategist at
Interactive Brokers in Greenwich, “When does it end? I don’t know.”
……………………………………………………………………………...
Good
health, stay calm and safe, try to think positive, and till next time….
The Curmudgeon
ajwdct@gmail.com
Follow
the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor
Sperandeo is a historian, economist and financial innovator who
has re-invented himself and the companies he's owned
(since 1971) to profit in the ever changing and arcane world of markets,
economies and government policies.
Victor started his Wall Street career in 1966 and began trading for a
living in 1968. As President and CEO of Alpha Financial Technologies LLC,
Sperandeo oversees the firm's research and development platform, which is used
to create innovative solutions for different futures markets, risk parameters
and other factors.
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