Wall Street giants lose billions in battle with amateur investors, and more insights for investors in property news this week…
Our aim is to glean the important economic and property insights affecting investors from the torrent of information filling the newsfeeds each week so you don’t have to. We then present them in digestible snack form so you can update yourself over morning tea.
Read on and enjoy your economic and property news this week.
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In property news this week…
- Wall Street giants lose billions in battle with amateur investors.
- Insurance trap for buyers of multi-unit properties.
- Bank lending restrictions expected to be increased.
- Shake-up of trusts about to come into force.
- Judith Collins says free up land and bring in more tradespeople.
- Government commended for helping businesses survive pandemic.
- Businesses are doing so well they’re struggling to find staff.
- Bernie Sanders and his mittens take the internet by storm.
Wall Street giants lose billions in battle with amateur investors
The battle over GameStop (GME) shares blew up the internet this week. All because, for once, the little guys are beating Wall Street at its own game.
First, here’s the back story…
GameStop is a struggling 37-year-old brick-and-mortar retailer. Its stores were the go-to spot for gamers in malls across the US. But it was too slow to adapt as consumers drifted away from in-store purchases to digital and online gaming.
The chain has lost nearly half its revenue over the last 5 years, from $9.4 billion in 2016 to a forecast $5.3 billion this financial year, and shuttered 2,000 stores.
GameStop shares last year averaged about $7 and hit a low of $2.57 in April.
Last August Ryan Cohen, co-founder of online petcare business Chewy, started amassing a stake as an activist investor and this month became a board member of GameStop.
Investors hope he can engineer a turnaround and accelerate the company’s digital transformation.
But big funds didn’t buy into the hype. The most optimistic price target on Wall Street was $33 while others have a $10 price target and underperform rating on the stock.
Major hedge funds even bet billions of dollars against GameStop by short selling its shares, expecting the shares would fall.
Bloomberg reports on how this caught the attention of amateur investors who meet online in Reddit’s WallStreetBets forum. When they found out that 84% of GME shares were short, they banded together to take on Wall Street.
They either bought GME shares outright or leveraged themselves by buying call options in a classic short squeeze move.
A short squeeze occurs when a stock jumps sharply higher, forcing those who had bet that its price would fall, to buy it in order to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock’s price.
When the hedge funds saw the share price going up they just saw an even bigger profit opportunity and doubled down.
But the Redditors said f*** you and tripled down, with one commenting, “We can be retarded longer than you can be solvent”.
The Redditors’ efforts were given an unexpected boost by Elon Musk, who himself suffered for years at the hands of hedge funds trying to force Tesla’s share price down by shorting the stock and profiting in the process.
Musk fought them off then and got his revenge now when he tweeted “GameStonks” and linked to the r/Wallstreetbets forum, following which the share price jumped 150%.
The Redditors’ war on Wall Street has been incredibly successful. Last week, GME shares hit a record high of $483 giving it a market capitalisation of $28 billion and catapulting it into the S&P 500.
Two giant hedge funds – Point72 Asset Management and D1 Capital Partners – have suffered bruising losses, and Melvin Capital had to be rescued after it got beaten down.
The losses suffered by these Wall Street giants likely ranks amongst their worst-ever performances…
- Point72, a $19 billion fund, is down 10-15% so far this month.
- Candlestick Capital, a $2.8 billion fund, is also down 10-15%.
- D1, a $20 billion fund and one of last year’s top-performers, is down 20%.
- Melvin Capital, a $12.5 billion fund, is down 30% and had to be rescued with a $2.75 billion cash injection.
- Maplelane Capital, a $3.5 billion fund, is down 45%. It was previously closed to new investors but is now trying to raise additional capital.
In total, it is believed that $11 billion has been erased as hedge funds have closed out their loss-making positions.
It’s an embarrassing turnaround for the hedge funds, which had profited handsomely from the wild markets brought on by the Covid-19 pandemic.
But the crisis pushed hundreds of thousands of amateur investors into the US share market, creating a new force that has caught Wall Street unprepared.
Some see it as a form of wealth transfer with the losers being large hedge funds and the winners lower-income internet users, some of whom are only putting up a few hundred dollars.
Their “live by the sword, die by the sword” attitude to the hedge funds is, in many ways, revenge for the GFC. They’re delighted the hedge funds are finally getting a taste of their own medicine.
Chalk one up to the underdogs!
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Insurance trap for buyers of multi-unit properties
People buying into high-density housing are being told by the insurance industry to do due diligence before signing a contract.
“If a unit is attached to other units and doesn’t have a body corporate structure in place, many insurers may not provide insurance because of complexities that can arise at claim time if not all units are insured or if they have different levels of cover from different insurers,” Insurance Council chief executive Tim Grafton said.
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Bank lending restrictions expected to be increased
Bank lending restrictions are expected to be increased to curb a surge in the number of investors buying residential property.
CoreLogic senior property economist Kelvin Davidson said there was a rising possibility that a 40% deposit requirement for investors could be officially mandated later in the year by the Reserve Bank.
COMMENT: This attempt by the Government to solve the housing crisis by suppressing demand flies in the face of expert evidence pointing to a shortage of housing supply as the major factor driving property prices through the roof.
What’s needed is to build more houses. To do that at scale requires addressing the factors holding people back from building more houses.
It’s quite simple really… building more houses will take the pressure off prices.
But solving the supply-side issues takes time and Labour want to be seen to be doing something. Anything. And investors are a soft target. <Sigh>
Shake-up of trusts about to come into force
New laws covering the governance of trusts comes into effect at the end of the week and promises to be the biggest shake-up in the sector in decades, reports RadioNZ.
The new Trusts Act replaces loose, outdated regulations with best practice systems covering compliance and accountability to all beneficiaries, not just those who received a benefit from the trust.
The changes make it easier for beneficiaries to challenge the decisions of trustees through the courts.
Such a legal challenge may result in trustees being removed from their roles as the legal owners and managers of the trust’s assets.
Judith Collins says free up land and bring in more tradespeople
New Zealand faces the risk of a generation being locked out of the housing market unless land is freed up and more houses built, National Party leader Judith Collins says.
Collins has written to the prime minister calling for a special select committee to develop legislation giving the government the power to re-zone land for development.
She also called for a range of measures, including faster re-zoning, faster Council consents, allowing more tradespeople in to the country to help build housing, and building infrastructure faster.
Prices would drop once there were more houses built than people wanted to buy, Collins said. “It is all about supply and demand. There is nothing magical about this – we need more houses and more accommodation.”
COMMENT: Such measures are preferable to the wishes of some developers who want to abolish the rural-urban boundary so they can continue Auckland’s sprawl out into the countryside.
Not only does this lead to further environment degradation, it requires greater infrastructure investment than building higher density within Auckland’s existing limits.
As the classic book A Pattern Language: Towns, Buildings, Construction says, laws are required to protect the countryside “since nothing less can deter money-hungry developers from building everywhere”.
Government commended for helping businesses survive pandemic
Businesses have given the government’s Covid-19 emergency tax measures high marks, although not all measures have rated highly.
A recent survey of clients by Chartered Accountants and Tax Management has found the government’s shotgun approach to tax relief mostly hit the target.
The most popular measures included increased provisional tax thresholds, immediate low-value write-offs and allowing the deferral of tax payments and use of money interest asset write-offs to help businesses survive the pandemic.
Businesses are doing so well they’re struggling to find staff
Commenting on the New Zealand Institute of Economic Research’s (NZIER) Quarterly Survey of Business Opinion released last week, Tony Alexander says labour shortages – whether skilled or unskilled – is once again a big problem for businesses.
This was a big problem for an increasing proportion of businesses before Covid-19 came along. It then went off the radar for a while but has now returned in full force, says Alexander.
“A net 43% of firms in the December quarter said that they were finding it hard to find skilled labour. This was well away from the net 19% finding it easy in the June quarter but exactly the same as difficulties from June quarter 2019 to the March quarter of last year.”
“Things were tighter in 2018 but not by all that much, and the way the anecdotes are going that degree of tightness looks set to return soon”, says Alexander.
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And finally, in not-property news this week something too good not to share…
Bernie Sanders and his mittens take the internet by storm
The woolly mittens that US Senator Bernie Sanders wore to the presidential inauguration has sparked endless photoshopped memes on social media.
They also helped raise NZ$2.5 million in the last five days for charitable organisations through the sale of merchandise with the January 20 image of him sitting with his arms and legs crossed, clad in his brown parka and recycled wool mittens.
Sanders put the first of the so-called “Chairman Sanders” merchandise, including T-shirts, sweatshirts and stickers, on his website Thursday night and the first run sold out in less than 30 minutes, he said.
The photo of Bernie Sanders has been transposed across time and place, dropped into historical moments, movie scenes, famous paintings and more.
Here are a few of the best ones I could find…
And my personal favourite…
That’s it for this week, thanks for hanging in there.
Cheers, Brandon 🙂
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This content is provided for general information only and should not be relied upon or used as a basis for making any investment or financial decision. To the extent that any information or recommendations in this content constitute financial advice, they do not take into account any person’s particular financial situation or goals. As individual circumstances differ, we strongly recommend you seek independent legal and/or financial advice prior to acting in relation to any of the matters discussed herein. Neither Provincia Property Fund Ltd nor Provincia Property Management Ltd nor Provincia Property Fund Management Ltd nor any person involved in this content accepts any liability for any loss or damage whatsoever may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this content.
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