In this week,
WALL STREET BETS & MELVIN CAPITAL: THE SHORT SQUEEZE
This week has been one to remember in markets. A community of more than 2M people in Reddit, in an attempt to fight big short selling hedge funds, massively bought several shorted stock such as GameStop ($GME) and $AMC among others. We are talking about stocks with short interest ratios that were at around 260% of the float. There were far more people shorting these stocks than shares available in the market. A perfect situation for profitable short squeezes for those long in the stock. And a scary situation for short selling hedge funds such as Melvin Capital that was bailed out by Citadel and Point72 to avoid bankruptcy.
A short squeeze happens when there is increased demand for a stock with high short interest ratio (many short positions). Increasing prices force short sellers to buy the stock to cut their losses. Therefore, everyone buys the stock pushing the price into the stratosphere.
Trading sessions in these stocks have been full of halts by the S.E.C due to volatility. Robinhood, a broker whose mission is to democratize the access to the stock market with low fees, restricted trades in these stocks yesterday unleashing the anger of many of its clients. But there is a rationale behind this move. Robinhood has to protect itself from any losses that could exceed its clients’ account equity as they would be liable for those losses. A sudden pullback in many of these stocks would endanger Robinhood’s solvency.
WallStreetBets movement is shaking the market and causing liquidations of many positions to invest in these shorted stocks and other assets such as Dogecoin, the latest trend. This cryptocurrency rocketed 350% higher yesterday and 300% today in what it is said to be the next WSB bubble.
APPLE AND TESLA EARNINGS
Tesla reported its Q4 2020 earnings this week to end its first profitable year in history. Automotive gross margin increased a 4.37% this year with total production increasing 71% and total deliveries increasing 61% YoY. Tesla continues to lower the production costs of its two models as batteries become cheaper.
Its energy storage business also has bright prospects. Energy storage deployments grew substantially in 2020, increasing 83% compared to the prior year.
Autopilot is becoming more and more robust with huge amounts of data being collected and processed on a daily basis. These recent developments are key for Tesla to take advantage of the massive opportunity the autonomous taxi market represents.
Tesla’s shares slid 3% on Thursday.
On the other hand, Apple reported its highest net profit ever in Q4 2020 as revenues topped $111bn driven by a 57% rise in sales in China. Revenues from every Apple product grew at double-digit percentages this fourth quarter, with a remarkable 41% in iPad sales. The company did not provide any guidance for the next quarter but said this trend will continue as more countries adopt 5G technology.
Here you can find the 1-week S&P500 performance heat map: