The World Zigs, China Zags | The Daily Peel | 1/21/22

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Market Snapshot

Yields were up, stocks were down, and investors were confused. That was the story of yesterday as indices largely opened in the green only to get slammed midday and close red. Once again, the Nasdaq sank the most, losing 1.3%, while the S&P fell 1.1% and the Dow dropped 0.89%.

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Let's get into it.

 

Macro Monkey Says

DeepF*ckingValue and His 25mm New Friends - Keith Gill, aka Roaring Kitty, aka DeepF*ckingValue, aka the King of Retail Traders, has amassed 25 million new friends since COVID-19 rolled up. That's right, through a mix of volatility, boredom, excitement, and influencer inspiration, 25 million new brokerage accounts appeared in 2020 and 2021. From those, one thing is truer now than ever before: retail matters.

According to the WSJ and the analysis done by JMP Securities, an estimated 15 million new brokerage accounts were made in 2021. That's a 33% increase from 2020 when everyone was debating if retail trading interest would last once more traditional forms of mass entertainment like sports and seeing friends were cool again. That debate was closed once Mr. Keith Gill and his legions of traders on r/WSB took centerstage.

One year ago, GameStop shares closed at $39.12 and would, in the next week, explode over 1,700% to a closing peak of $325. AMC sat at $2.97. Now, retail runs the market. Okay, not really, but compared to any other time in history, yes. On peak days in 2021, 40% of the daily equity volume was flows in and out of retail accounts. According to a Bloomberg survey, 85% of hedge funds and 42% of asset management firms analyze retail trading chat rooms to assess sentiment and attention and (probably) for some stock tips. J.P. Morgan, the suit-iest of banks, even said, "flow from retail is not something you can ignore."

However, 2022 brings a different story. In addition to wondering whether retail would stick around when "real" entertainment came back, the question remains if retail traders can stomach a bear market. With the Nasdaq officially closing in correction territory on Wednesday (10% down from the recent high), we might find out soon.

monthly purchases of equities by individual investors

The World Zigs, China Zags - While every other country and their mother is tightening monetary policy and raising rates, China just did the opposite. Never one to follow the crowd, the PBoC announced it had cut the nation's 5-year loan prime rate, a benchmark for intermediate and longer-term rates like mortgages, to 4.6%. Granted, it was at 4.65% before, but hey, a cut is a cut.

And in this market, even a cut of 5bps will carry some large ripples. Other rates saw steeper cuts, like the 1-year loan prime rate, which was cut twice as much as the 5-year, going from 3.8% to 3.7%. It had been many moons since either rate was dropped by the PBoC, going back to April 2020 for the intermediate-term benchmark rate, but China is in a whole different ballpark than we in the US and other Western nations are.

For starters, growth is slowing. Thanks to property market troubles sparked by the infamous Evergrande, credit has been tighter, leading to a slowdown in the velocity of money and economic growth overall. A mild slowdown normally wouldn't be too bad, but this is arguably the single most important year of President Xi's rule. This fall, the National Congress of the CCP meets for the 20th time, with one of its main goals being to elect a leader as Xi's second term will be up. Traditionally, Chinese leaders serve two terms of five years. In 2018, however, Xi conveniently removed the whole term limits thing, leading many to expect him to hold onto the reigns for a third term. Getting votes to do so will be a lot harder during an economic recession.

Don't be surprised if China is a bit more relaxed than others when it comes to monetary and economic policy this year. Xi wants to remain at the helm of the CCP, and he wants it bad. Stay tuned to see how that plays out this fall.

 

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What's Ripe

JD.com ($ JD) - For the first time in literally years, Chinese tech stocks have a reason to thank their government. And with yesterday's 6.5% gain, no one has more thanks to give than JD.com. As we said up there ^, China's central bank, the PBoC, cut major policy rates in an attempt to boost the economy. Well, just like here in the states, rate cuts are good for stocks and great for high growth/tech names. Thanks, Xi.

Morgan Stanley ($ MS) - All the other banks had their turn, and now Morgan Stanley gets the spotlight. The firm reported earnings Wednesday afternoon, much to the liking of investors. Earnings came in at $2.01/sh as opposed to $1.91 expected on $14.5bn in revenue, slightly below the $14.6bn estimate. Seeing similar boosts in equities trading and investment management as its fellow bank brethren, Morgan Stanly managed to keep costs under control far better than the others. In turn, traders gave them a 4.3% boost yesterday.

 

What's Rotten

Peloton Interactive ($PTON) - Just when you thought it couldn't get any worse, Peloton surprised us once again. Shares absolutely plummeted yesterday, losing 23.9% on maybe their worst announcement yet. We knew the demand for their bikes was slowing, but not this much - Peloton announced that they will be temporarily halting production on all exercise products for at least six weeks, saying Bike+ production won't be back until June. Yeah, not producing the products you sell is a bold move. Is this the best way to beg for a buyout?

Lordstown Motors ($RIDE) - Somebody get Lordstown a ventilator; they're running out of life. Shares plunged 9.0% yesterday to yet another new record low of $2.62. Lordstown stock appears perfectly caught in the mix of a selloff of tech names and a huge selloff of once-high-flying EV stocks – the classic double-whammy. Now, shares are down over 90% since peaking in Sep 2020. Deep value or deep trouble?

 

Thought Banana:

From ♥ to $ - Put down your phone; we're looking at Instagram together today. Teenagers' third-favorite social media app (1. Snapchat, 2. TikTok) is releasing a brand new feature through the softest rollout in tech history. Starting yesterday, IG users are officially able to subscribe to creator accounts to get access to exclusive content like subscriber-only stories, lives, and badges.

But… there's a couple of catches. First, as of now, only 10 accounts have the subscription feature. These include the most C-list celebrities you could think of, such as Oregon Women's basketball star Sedona Prince, actor Jack Jerry, and several other self-appointed "digital creators." None of these users have more than ~580k followers, which seemed weird at first, but I guess people like Kim Kardashian (281M IG followers) and Cristiano Ronaldo (392M) don't really need the added income stream.

Now the second catch, there is an Instagram-set price range that creators can charge, and Instagram itself promised not to take a cut for at least a year (yeah, "okay" Zuck). Subscriptions will go anywhere from $0.99 to $99/month, with creators getting the ultimate choice. By not taking a piece of the subscription pie, this move is likely little more than an attempt to steal creators' time away from other apps (aka, TikTok) and bring that classic influencer-cringe over to the Zuckerverse.

The rollout will be expanded to more creators over the next "few months," given initial testing goes well. Meta's not messing around in the subscription-content market anymore. Last year, Facebook Fan Subscriptions rolled out along with the firm's announcement to invest $1bn in supporting creators. Zuck watched TikTok snap up creators and cash that should've been his for years, but now, it looks like he's doing his best to make that change.

Wise Investor Says

"The investor's chief problem - even his worst enemy - is likely to be himself." - Benjamin Graham

 

Happy Investing,

Patrick & The Daily Peel Team

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