Category Archives: Markets

GameStop – The Casino at Broad and Wall

I thought it was a very strange story. “Analysts confounded by GameStop price moves” read the headline in the business section of one of the world’s most widely read newspapers. “Recent volatility in the stock of GameStop has confused analysts following the video game retailor” read the lede line.

That there had been great volatility in the price of a share of GameStop was not debatable. The stock was trading below $20 a share at the end of 2020. On January 29, 2021 it hit $325. That’s a jump of 1,625%. If you had bought 100 shares on December 31, you would have paid $2,000. On January 29, one month later, your 100 shares would have been worth $32,500. If you think you understand the stock market that is a mindboggling increase. Certainly one to “confound” and “confuse.” But as your intrepid reporter wrote in my primer for the National Center for Business Journalism, stock markets are not what they used to be.

My grandmother Edna gave me ten shares of AT&T stock when I graduated from the 8th grade. She was a big believer in the stock market and AT&T, at the time the national monopoly telephone company and the most widely held stock in the world, was her favorite. At a monopoly utility, its revenue and profit was controlled by the government. In return, it held an exclusive franchise which made it a company almost completely protected from competition. As a result, the stock price remained very stable. And so did the dividend. The shares provided holders with a high degree of safety and a steady income.

In other words, AT&T shares traded predominately on their fundamentals, based on the health and business of the company and also on the health of the economy as a whole. In 1965, total trading volume for the year ran a few of billion shares.

Today the New York Stock Exchange can trade a couple billion shares between the opening and lunch. And swings in stock prices, where a one percent a day move was once considered extreme, can now be seen moving ten, twenty percent or more in a day.

The reason should neither confuse or confound. The simple truth is that the market has evolved from a relatively staid place where companies came to raise money for their growth and expansion and investors came to put their money to work for the benefit of the overall economy, to a casino where people with money try to out maneuver other people with the goal of adding to their money horde.

The stock market is no longer a good indicator of the health of the economy. It is, at least on a short term basis, decoupled from reality, manipulated by big time traders who care nothing about the prospects for a company. They just trade the company stock because they have identified certain characteristics in price movements which they believe can make for profitable trades in the short run.

So a battle between short sellers, who were betting that shares on GameStop (ticker symbol GME) would go down, found themselves challenged by a group of day traders who thought it would be fun to gang up on the so-called pros. The day traders, lacking the large bankroll of the hedge funds, banded together and bought the stock without concern for the company’s lackluster performance and poor prospects. That drove up the price, which put the squeeze on the hedge funds which had shorted the stock.

Definitions: shorting a stock means borrowing stock you do not own and selling it, making a bet the price will go down, enabling you to buy at a lower price and return the borrowed stock. Hedge funds sound like they are following a rational, conservative strategy but are really just large pools of money from rich people willing to take very large chances in the hopes of making even larger profits. Because they are only available to so-called sophisticated investors, they are virtually unregulated.

Why do we care?

Part of me says we shouldn’t care. Just recognize that the markets are manipulated and individuals should probably stay away. Refrain from judging a political leader’s performance by the movement of the Dow Jones average. And chalk the newspaper story referenced above to the work of a poor reporter operating in an environment where where are few editors.

But one thing about the GameStop affair bears note, as indicated in the chart below:

From CRS Report

In the midst of the wild price movements a discount brokerage, Robinhood, which caters to the day-trader crowd, restricted trading in GameStop shares. There are some situations where a brokerage has the right to do this. But they generally involve risk exposure for the broker involving a client who has borrowed on margin or sold short and may not be able to cover loses. My understanding of the GameStop incident is that Robinhood blocked all trading, even for those individuals who owned the shares and now wanted to sell and collect their profits. The broker would face no risk in that trade.

The Congressional Research Service has identified policy issues for Congress to consider as a result of GameStop. But I have a feeling this will just result in more talk and no action. It is interesting to note that hedge fund manager Leon Cooperman complained loudly about the day-trader’s action. The hedge fund managers for once found themselves playing defense. I have never heard complaints about the hedge funds and the banks, which generally trade with their own exchange memberships, regularly take advantage of individual investors due to superior knowledge of order flows, priority positioning of their trading computers and the ability to trade virtually anywhere at any time, avoiding any market suspensions or circuit breaker provisions.

My personal pet peeve is something called high frequency trading, a principal reason for the huge trading volumes these days. These systems use computers to buy and sell, sometimes holding a stock for only a fraction of a second, based on complex algorithms evaluating stock price, volume and order flow.

None of these technologies add much if anything to the nation’s economy. They consist of the financial insiders trading amongst themselves and increasing their wealth at the expense of those who they catch in the massive price swings they engineer.

They’ll make a lot of noise and probably hold hearings. But I’ll be shocked if the regulators take any meaningful steps to reign in the professional traders. After all, it’s the pros who make campaign contributions. The individual traders do not.

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Financial Market Reporting, Part 9: Exchange Traded Funds

In my recent post on mutual funds, I noted that John Bogle disrupted that industry with Vanguard, a mutual fund company that specialized in low cost index funds designed to mimic rather than outperform major market indexes. The other mutual fund companies responded with their own index funds, and there is intense competition between them

Mutual fund shares vs. ETFs

Exchange Traded Funds, ETFs, are another refinement of the fund category. They will certainly figure into your reporting on the fund asset class because they are by some measures the most popular of all exchange traded securities.

For my primer on ETFs, see businessjournalism.org.

Financial Market Reporting, Part 8: Mutual Funds and Index Funds

In a previous post about indexes, I identified the Dow Jones Industrial Average and the Standard and Poor’s 500 as the two most frequently referenced. They originated as short-cuts that summarized market trends, and are often used as a benchmark against which investment performance can be judged.

There has been an explosion in the number of indexes in recent years. There are hundreds if not thousands available, enough to slice and dice the markets in as many ways as can be imaged. Some are broad-based, like the NASDAQ Composite with more than 3,000 stocks. Others might track a region, like the EURO STOXX 50, based on 50 large companies in the Eurozone. Some follow companies of a certain size, like the Wilshire US Small Cap. And still others focus on an industry, such as the NYSE Arca (originally AMEX) Semiconductor Index.

Continues at businessjournalism.org….

Financial Market Reporting, Part 7: Indexes

Business reporters can get up to speed on market indexes with a backgrounder on the Dow and S&PIn my first Financial Market Reporting piece, I complained that many reporters make casual reference to “the market” without specifying what they mean. Usually, I wrote, they mean the Dow Jones Industrial Average, which I called the “best known” stock market measure. The DJIA is just one of a multitude of stock market indexes that pop up in virtually every discussion of the markets, including reports evaluating individual stocks and other investment vehicles. So they warrant a closer look.

The first index

The DJIA was not the first stock market index. It was not even the first index created by Charles Dow. In 1880 Dow, who was 29 years old, moved to New York and got a job at the Kieman Wall Street Financial News Bureau, which furnished financial news to banks and brokerages. In those days there was a lot of “fake” news, designed to tout companies and their stocks. But the Kieman service had a reputation for sticking to the facts.

Dow figured if one responsible news service could succeed there was room for more, and with a fellow reporter, Edward Jones, founded Dow, Jones & Company. The pair produced newsletters and summaries of financial news, which they delivered to financial institutions and investors. Their “Customer’s Afternoon Letter” quickly grew to have more than 1,000 subscribers.

Continues at businessjournalism.org….

 

Lunch with Paul Kangas, Nightly Business Report

Paul Kangas

I remember one specific lunch with Paul Kangas. Silly, isn’t it? I spent a fair amount of time with Paul during the many years I was associated with public television’s Nightly Business Report. That included several meals with a man who, among many other things, appreciated good food and drink. Why would one particular lunch stand out?

It was 1990. A year before I had moved from Chicago, my hometown, where I worked for CBS, NBC, and as a freelance contributor for NBR, to New York. Here I was NBR’s New York Bureau Chief and Senior Correspondent. Paul had been with NBR since it first went on the air in 1979. A former stockbroker, Paul was at first the broadcast’s stock commentator. Later he added co-anchor to his role.

But Paul was so much more than his title implies. On a broadcast that itself defined a new role for business news on television, Paul set the standard for both the program and the industry.

Continue reading…

Financial Market Reporting, Part 5: "Real Stuff," Commodities and Futures Contracts

The latest in my series on financial market reporting is live at the Reynold’s Center:

Previous posts introduced the markets and the best-known investment vehicles, stocks and bonds. But even if you don’t own one of those investments, you probably have placed a considerable amount of money in a different asset class, although you may not consider these to be investments.

I’m referring to real assets, physical items, the “stuff” we accumulate throughout our life. If you’ve ever sold an item on eBay, you know what I mean. You might have sold a used item you’ve upgraded or outgrown. Or you could have sold a “collectable,” an item you bought in the belief that its value would grow over time (Beanie Babies, anyone?) These are “real” assets.

Continued at businessjournalism.org….

Financial Market Reporting, Part 2: IPOs

The day a company first sells stock shares to the public marks a right of passage. The initial public offering or IPO means the company is able to meet the long list of legal requirements that govern the trading of stock on a public exchange. It also means the company has been able to convince enough investors to buy the shares at a price that meets corporate fund-raising goals.

The lesson continues at the Reynolds Center…..

 

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