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It’s likely going to take a constant stream of excited buyers to keep the GameStop, AMC rally going

The David-vs.-Goliath premise in the GameStop saga is somewhat flawed.



Traders work on the floor of the New York Stock Exchange.


The vivid popular storyline in the markets last week portrayed the masses of small-fry investors getting the better of Wall Street’s bullies, with frenzied buying of heavily shorted cast-off stocks dealing massive losses to smug hedge-fund managers who had had used bearish bets to abuse the likes of GameStop and AMC Entertainment.

There’s truth in this as far as it goes – but it goes only so far as to cover perhaps a few-dozen stocks with extremely high short interest, and does not imply the broad market is ripe for these short-squeeze stampedes to be a strong or lasting driver of the investment outlook.

A couple of flawed premises are at work in the simple David-vs.-Goliath angle. For one thing, neither hedge funds nor short sellers have ruled the Wall Street playground by any stretch in recent years. Quite the opposite, in fact.

And the current market has an unusually low short base relative to overall market value, which if anything implies less of a cushion of entrenched bearishness to fuel index gains from here.

Annual returns for equity long-short hedge funds over the last five years have ranged from negative 3% to a gain of 9%, according to BarclayHedge. Over that same period the S&P 500 has returned 15% annualized. If hedge funds were market bullies able to have their way with stocks they pile into, why would they have limited themselves to such meager rewards?

While academic research has shown heavily shorted stocks have underperformed over the long-term, this factor is not consistent over all periods. JP Morgan strategists last week showed that crowded-short stocks have performed roughly in line with the market as a group in the past few years, before beginning to outperform strongly in recent months as the “squeeze event” got rolling.

Short selling is expensive and risky, given that it’s often costly to borrow shares, losses are theoretically limitless as stocks can rise indefinitely, and the preponderance of incentives among corporate executives, analysts, bankers and long-term investors is to push stock prices higher.

This is not to solicit sympathy for the poor short seller or deny that shorts way overplayed their hand in targeting the cluster of stocks now surging on social-media-emboldened squeezes. It’s simply to point out these were never all-powerful predators who were able to profit from self-fulfilling short bets.

In fact, the days-long binge on the shares and, especially, the call options of the handful of favorite back-from-the-dead stocks raises the question of whether the squeezers are the ones possibly overplaying their hand now.

Constant stream of buyers needed

This data from Barclays shows the precipitous surge in options buying on short-squeeze names this year, both including and excluding GameStop, the squeeziest of the squeeze stocks.

The massive exposure to these stocks through options in retail-client accounts is what forced Robinhood and other brokerage firms to restrict trading in some tickers, because of the heavy cost of posting collateral in the clearing-and-settlement process that occurs over two days after a trade is made.

With these stocks up huge and volumes enormous in recent days, it will likely require a constant stream of excited buyers to support these shares.

As an illustration of rising stakes, AMC shares went from just over $5 at Tuesday’s close to finish Friday at $13.26. Yet the average price paid by all investors in the stock over those three days was over $14, given how much time the shares spent between $13 and $16. A stock up huge but with latecomer investors underwater, and in this case a company that has repeatedly issued new shares to shore up its balance sheet.

There surely remains substantial short interest in many of these names even after the bears’ bloodletting. While official data come only every two weeks and with a lag, short-sale analytics firm S3 Partners calculated Friday that as of Thursday there remained well more than 50 million shares in GameStop short – down from some 70 million two weeks ago but still a heavy bearish position.

(Note the GameStop short position has routinely been described as far exceeding the entire share float. This is never true: When a share is sold short, a new long position is created and added to the float. The same share is effectively owned by the original owner and the one who bought it from the short seller who borrowed it.)

Broader market contagion?

So, in these names, perhaps the squeezes have more to go. But this must remain a pretty localized affair because the amount of short exposure across the market is at a 12-plus-year low relative to total equity market value.

For sure, the aggregate dollar loses being absorbed on the short side of the market are not trivial in the short term. Data analysis firm Ortex calculates the net loss this month exceeds $50 billion – a big chunk gouged out of the long-short investing cohort.

And the losses along with the searing volatility from the relentless squeeze buying destabilized portfolios enough to cause selling down of crowded long positions, a factor clearly driving part of the 3.3% drop in the S&P 500 last week. Analyst Richard Repetto of Piper Sandler notes the group of wild squeeze stocks “have made up 4.6%-7.6% of total U.S. consolidated equity volumes, which compares to the mere ~0.5% of volumes the group comprised prior to the Reddit hysteria.” And these names’ intraday volatility over the past five trading days “has averaged 72.2% compared to that of the S&P 500’s 1.5%.”

Barclays strategist Maneesh Deshpande says, “The key question is whether the stresses from the short squeeze will cause a broader contagion as the shorts are forced to de-lever. The bottom line is that while the pain could continue in the short term, the risk of a full-fledged contagion remains low.”

The total market capitalization of the stocks with a short-to-float ratio above 20% is only about $40 billion. That’s one-tenth of 1% of total US market cap approaching $40 trillion.

And assuming the squeeze-and-chase game continues until the shorts vacate the playground, it would result in a market with even less of a short cushion, which is a headwind for stocks from a contrarian perspective.

We’re not there yet. And the current 4% pullback could surely be simply a needed shakeout in an over-long, over-loved market that had run up 18% in about ten weeks.

But a depleted short base is another unexpected factor to ponder, along with a new market rhythm – no longer the passive-index and quant-algorithm dominated tape that prevailed in recent years, and a more emotional, energetic, undisciplined and populist flow coming from legions of small fries.

There’s truth in this as far as it goes – but it goes only so far as to cover perhaps a few-dozen stocks with extremely high short interest, and does not imply the broad market is ripe for these short-squeeze stampedes to be a strong or lasting driver of the investment outlook.



Fed Chief Powell, other officials owned securities central bank bought during Covid pandemic

Federal Reserve Chairman Jerome Powell owned municipal bonds of the same type bought by the Fed during the coronavirus pandemic.



Amid an outcry about Federal Reserve officials owning and trading individual securities, an in-depth look by CNBC at officials’ financial disclosures found three who last year held assets of the same type the Fed itself was buying, including Chairman Jerome Powell.

None of these holdings or transactions appeared to violate the Fed’s code of conduct. But they raise further questions about the Fed’s conflict of interest policies and the oversight of central bank officials.

  • Powell held between $1.25 million and $2.5 million of municipal bonds in family trusts over which he is said to have no control. They were just a small portion of his total reported assets. While the bonds were purchased before 2019, they were held while the Fed last year bought $21.3 billion in munis, including one from the state of Illinois purchased by his family trust in 2016.
  • Boston Fed President Eric Rosengren held between $151,000 and $800,000 worth of real estate investment trusts that owned mortgage-backed securities. He made as many as 37 separate trades in the four REITS while the Fed purchased almost $700 billion in MBS.
  • Richmond Fed President Thomas Barkin held $1.35 million to $3 million in individual corporate bonds purchased before 2020. They include bonds of Pepsi, Home Depot and Eli Lilly. The Fed last year opened a corporate bond-buying facility and purchased $46.5 billion of corporate bonds.

Among those questions: Should the Fed have banned officials from holding, buying and selling the same assets the Fed itself was buying last year when it dramatically widened the types of assets it would purchase in response to the pandemic?

The Fed’s own code of conduct says officials “should be careful to avoid any dealings or other conduct that might convey even an appearance of conflict between their personal interests, the interests of the system, and the public interest.”

In response to CNBC questions asked in the process of our research, a Fed spokesperson released a statement Thursday saying Powell ordered a review last week of the Fed’s ethics rules surrounding “permissible financial holdings and activities by senior Fed officials.”

A Fed spokesperson told CNBC that Powell had no say over the central bank’s individual municipal bond purchases and no say over the investments in his family’s trusts. A Fed ethics officer determined that the holdings did not violate government rules.

Barkin declined to comment.

Rosengren has announced he would sell his individual positions and stop trading while he is president. Dallas Fed President Robert Kaplan, who actively traded millions of dollars of individual stocks, also said he would no longer trade and would sell his individual positions. But he said his trade did not violate Fed ethics rules.

A spokesman for Rosengren told CNBC that he “made sure his personal saving and investment transactions complied with what was permissible under Fed ethics rules.”

But Dennis Kelleher, CEO of the nonprofit Better Markets, said if some of these Fed actions are not against the rules, the rules need to change.

“To think that such trading is acceptable because it is supposedly allowed by Fed’s current policies only highlights that the Fed’s policies are woefully deficient,” Kelleher told CNBC.

While trading by Rosengren and Kaplan was not conducted during the so-called blackout period, when Fed officials are not allowed to talk publicly about monetary policy or trade, Kelleher said during a crisis like last year, “the whole year should be considered a blackout period” because Fed officials are constantly talking and crafting policy in response to fast-moving events.


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Affirm stock skyrockets after company reports 71% revenue growth and strong guidance

The blockbuster earnings report comes after Affirm last month announced it’s teaming up with Amazon to launch a buy now, pay later checkout option on the site.



Affirm Holdings Inc. website home screen on a laptop computer in an arranged photograph taken in Little Falls, New Jersey, U.S., on Wednesday, Dec. 9, 2020.

Gabby Jones | Bloomberg | Getty Images

Affirm reported better-than-expected fiscal fourth-quarter results after the bell Thursday, including solid guidance and 71% revenue growth.

The stock soared more than 20% in extended trading following the report.

Here’s how the company did:

  • Revenue: $261.8 million vs. $225 million expected, according to a Refinitiv survey of analysts
  • Loss per share: 48 cents per share, which is not comparable to estimates

Affirm is one of the leading players in the burgeoning buy now, pay later space, which allows people to split the payment for their purchases into installments. Founded in 2013 by PayPal co-founder Max Levchin, Affirm made its stock market debut in January, with shares beginning trading at $90.90, after listing at $49 a piece.

Affirm gave upbeat guidance for the current quarter. It expects revenue for the fiscal first quarter of 2022 to come in at $240 million to $250 million, which surpassed analysts’ estimates of $233.9 million.

The company had 7.1 million active customers as of the fourth quarter, up from 5.4 million in the previous period.

The blockbuster earnings report comes after Affirm last month announced it’s teaming up with Amazon to launch the e-commerce giant’s first partnership with an installment payment player. The partnership allows Amazon customers in the U.S. to split purchases of $50 or more into smaller, monthly installments.

When asked how the partnership with Amazon came together, Levchin said on a call with investors that large retailers are realizing the buy now, pay later trend isn’t just a fad or a feature. “They look to us as a provider,” Levchin said.

In the earnings report, Affirm said its guidance for the full year and fiscal first quarter doesn’t factor in any potential contributions to revenue or gross merchandise volume from the partnership with Amazon, which is currently being tested with select customers before rolling out more broadly in the coming months.

— CNBC’s Kate Rooney contributed to this report.


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Oracle falls short on revenue as it ramps up cloud investment

While Oracle has been investing more in capital expenditures to meet expected demand for cloud services, revenue fell short of estimates in multiple segments.



Oracle CEO Safra Catz delivers a keynote address during the 2019 Oracle OpenWorld on September 17, 2019 in San Francisco, California. Oracle CEO Safra Catz kicked off day two of the 2019 Oracle OpenWorld with a keynote address. The annual convention runs through September 19.

Justin Sullivan | Getty Images

Oracle shares fell as much as 3% in extended trading on Monday after the enterprise software maker reported fiscal first-quarter revenue that came in under analysts’ expectations.

Here’s how the company did:

  • Earnings: $1.03 per share, adjusted, vs. 97 cents per share as expected by analysts, according to Refinitiv.
  • Revenue: $9.73 billion, vs. $9.77 billion as expected by analysts, according to Refinitiv.

Revenue increased by 4% year over year in the quarter, which ended on Aug. 31, according to a statement. In the previous quarter Oracle’s revenue had gone up 8%.

With respect to guidance Oracle CEO Safra Catz said she sees fiscal second-quarter earnings of $1.09 to $1.13 in earnings per share on 3% to 5% revenue growth.. Analysts polled by Refinitiv are expecting fiscal second-quarter adjusted earnings of $1.08 per share and $10.25 billion in revenue, which works out to almost 5% revenue growth.

“Cloud is fundamentally a more profitable business compared to on-premise, and as we look ahead to next year, we expect company operating margins will be the same or better than pre-pandemic levels,” Catz said. Oracle does not disclose revenue or operating income from cloud infrastructure or cloud applications.

Oracle’s largest business segment, cloud services and license support, generated $7.37 billion in revenue, which is up 6% and below the StreetAccount consensus estimate of $7.41 billion.

The cloud license and on-premises license segment contributed $813 million in revenue, down 8% and lower than the $859.7 million consensus. Oracle’s hardware unit had $763 million in revenue, down 6% and less than the $778.5 million estimate.

Oracle boosted its capital expenditures above $1 billion, compared with $436 million in the year-ago quarter. The investment comes after executives signaled they wanted to have the infrastructure necessary to meet expected cloud demand. Cloud infrastructure and cloud applications now represent 25% of total revenue, Oracle said in the statement.

In the quarter Oracle announced a support rewards program designed to encourage customers to adopt its public cloud services, and S&P Global Ratings lowered its rating on Oracle and its debt to BBB+.

Oracle shares have risen 37% since the start of the year, while the S&P 500 index is up about 19% over the same period.

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Here’s how the company did:


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