Beyond the Latest Meme Stock Mania?

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Patti Domm of CNBC reports AMC, meme stocks could spark more heat in the week ahead as investors await inflation news:

Inflation data is a highlight of the week ahead, as investors focus on economic news in the void between earnings season and the next Fed meeting.

May’s consumer price index is reported Thursday, and it could be hot after it surged at a 4.2% annual pace in April. Inflation is viewed as an important trigger that could cause the Fed to step back from its easy policies, if rising prices appear to be hotter and more persistent than expected.

Stocks were slightly higher in the past week, but the meme stocks were hot. AMC Entertainment gained another 100% and was up 2,700% since January.

Energy was the best performing major sector, gaining more than 6% as oil prices jumped nearly 5% in the past week. REITs were the second best performer, up 2.6%, followed by technology, up 1%.

But it’s the meme stocks that took the headlines, and also contributed to concerns about froth in the stock market.

“People think this is new. It completely isn’t,” Satori Fund founder Dan Niles said of the trading frenzy. He noted there was similar froth in individual stock names in 1999, when companies added dotcom to their names to attract investor attention.

“What’s new is the fact that these traders are armed with stimulus checks. They can organize more easily on things like WallStreetBets, they can work from home, and there’s no-cost trading. Those are the differences,” Niles said on CNBC.

“So, if it gets people interested in investing, that’s great. What I don’t like is when you have people sort of taking out mortgages on their home, and putting themselves at risk if the thing collapsed,” he added. “You want to be able to invest what you can afford to lose if you’re going to play in something like this.”

Steve Massocca, managing director at Wedbush, said the trading in names like GameStop and Bed Bath and Beyond is one of the things that has made him more cautious on the market. He said the high valuations on the meme names are unlikely to last. “It’s going to be around as long as cicadas are,” he said.

Watching the inflation signs

Massocca said investors should stay focused on things like inflation, since that could be what makes the Federal Reserve reverse its easy policy. The Fed has so far said it sees the higher inflation readings as transitory.

May CPI follows a 4.2% year-over-year pace for April.

“I’m getting nervous. I’m seeing signs of a top. I’m systematically raising cash. I think the market looks too expensive,” Massocca said. “We’re going to shake off the dust from Covid. The economy is going to be very, very good and as a rule, I think monetary policy is going to respond to some degree.”

He said the memes mania is just one sign, but the spark for a sell off could be anything including a hawkish comment from the Fed.

“Who knows what it is, but the kindling is building and as soon as a match hits it, the market is setting up for a 7% to10% pullback at some point,” he said. “Who knows what starts it ... One of the candidates very likely will be some kind of reductions in monetary policy.”

Fear of the Fed stepping back from its easy policy has been hanging over the market.

Friday’s May jobs report was being watched closely, but the lower than expected job gains reinforced that the Fed could continue to hold off on policy changes for the time being. There were 559,000 jobs added in May, well below the 671,000 expected.

Now the CPI report is the next point of focus, ahead of the Fed’s June 15-16 meeting. The question is, will it be so hot that the Fed may have to reassess its view about the temporary nature of inflation, or could it show that price increases are peaking?

“There’s inflation out there. You can see it everywhere,” said Massocca.

Taper talk

The market has been expecting the Fed to begin to talk about unwinding its bond buying later this year, with many strategists targeting the Fed’s Jackson Hole symposium at the end of August. The Fed is expected to first discuss cutting back its purchases months ahead of taking action. Then it will slowly reduce its buying.

After that, it could consider interest rate hikes, now not expected by the market until 2023.

Niles said the meme stock trend has been fueled in part by the Fed. The markets are awash in liquidity as the Fed keeps rates at zero and maintains its monthly purchases of at least $120 billion in Treasury and mortgage securities.

“When the Fed backs off of that with tapering, I think that’s when you can go in and say, ‘OK’ we can potentially go after and short some of these highly valued names because that’s when the free money disappears and you actually start to contract some of that free money,” he said. “That’s when things start to get dangerous to the downside.”

For now, Niles said he’s staying away from the names that are heavily sought by retail investors or have large short interest and are targeted by Wall Street. “You want to stay away from this stuff now unless you’re doing it in very small size,” he said.

There are just a few earnings in the week ahead. One of the handful of names reporting is meme name GameStop on Wednesday. Campbell Soup also reports that day, and Chewy reports Thursday.

G-7 finance ministers meet this weekend, and President Joe Biden will attend a meeting of the organization’s leaders in Cornwall, England on Friday.

Week ahead calendar

Monday

Earnings: Vail Resorts, Marvell Tech, Stitch Fix, Coupa Software

3:00 p.m. Consumer credit

Tuesday

Earnings: Thor Industries, Casey’s General Stores

6:00 a.m. NFIB small business survey

8:30 a.m. International trade

10:00 a.m. JOLTS

10:00 a.m. Quarterly Financial Report

Wednesday

Earnings: Campbell Soup, GameStop, Brown-Forman, United Natural Foods, RH, Bradley

10:00 a.m. Wholesale trade

Thursday

Earnings: Chewy, Dave & Buster’s, Signet Jewelers, John Wiley

8:30 a.m. Initial claims

8:30 a.m. CPI

10:00 a.m. Quarterly Services Survey

2:00 p.m. Federal budget

Friday

10:00 a.m. Consumer sentiment

It's been another wild week on Wall Street where we saw the meme stock frenzy of last week go into overdrive.

Once again, it was shares of AMC Entertainment (AMC) that took center stage after soaring last week, but there were others too like BlackBerry shares which also soared this week on massive volume before falling on Friday:

I'm convinced that the meme stock frenzy has nothing to do with retail investors, whether here or in India and Korea, and everything to do with Wall Street sharks pumping and dumping shares at will. 

On Thursday afternoon, I tweeted this out on how to quickly spot a pump and dump scam:

Of course, the pumpers on StockTwits hate it when I post this stuff (these boards are infiltrated by hedge funds pumping stocks), but I've seen so many of these pump & dump scams over the past year that it's really not too difficult to spot them. 

By the way, we saw the exact same thing in BlackBerry shares in late January when they spiked at $28.77 on massive volume before they fell back to earth (and volume dried up):

The same thing happened to AMC's shares recently but on a much larger scale as they more than quintupled in price over the last two weeks, reaching a high of $72.62 earlier this week:
 
Again, it's not retail driving this frenzy, it's institutions, high frequency trading hedge funds, asset managers, bank prop trading desks and pure greed and wild speculation on a scale we haven't seen since 1999.

And it's Vanguard, BlackRock and other ETF providers who made a killing on AMC shares, not day traders:

All this speculative nonsense is distracting investors from the economy and markets. 

In his latest Portfolio Strategy Incubator, Martin Roberge of Canaccord Genuity states this:

On Tuesday, we published the June 2021 edition of the Quantitative Strategist. One key highlight of the report is the confirmation that Q2 GDPs will likely mark “peak growth”. Already, the first panel of our Chart of the Week shows that growth in world central banks’ balance sheet has crested which means that global manufacturing PMIs will likely peak this summer. Also, global policy rates (second panel) are off from what should be secular lows and send a similar message. Interestingly, few investors seem aware that over the 23 rate-change decisions made by world central banks YTD, 19 were rate hikes and 4 were rate cuts. The net result is that investors should expect global growth to downshift in H2 which should lead to more volatility in risk assets. This is especially true if the Fed begins to taper its balance sheet preemptively. Today’s softer-than-expected payroll report is buying the Fed some time but a strong nonfarm payroll report in both July and August could force the Fed’s hand, especially if inflation continues to be sticky. Circle August 26-28 in your calendar, which is when the Jackson Hole Symposium is held. This is when the Fed could announce a tapering.

Interestingly, Francois Trahan of Trahan Macro Research just published a Macro Intern Guide 2021, going over key concepts every incoming intern should be made aware of.

You can view it here but I will bring this to your attention as it shows peak LEIs are coming later this year:


In terms of stocks, this would mean that cyclical shares (Financials, Industrials, Energy, Materials) which have been outperforming this year can continue to do well for the rest of the year:

 

Whether or not cyclical shares continue outperforming this year remains to be seen but as global growth continues to gain momentum, these sectors should keep doing well.

Nevertheless, longer term, slower growth is ahead because the fiscal thrust will turn into a fiscal drag, something Harvinder Kalirai, Chief Fixed Income & Currency Strategist at Alpine Macro noted on Linkedin earlier today:


Yes, Biden's infrastructure plan will help but the bulk of the fiscal thrust is over and once the fiscal drag comes in, we can expect slower growth for a long time.

That's why I can't understand those who keep beating the inflation drum, they're barking up the wrong tree once again confusing cyclical inflation for structural inflation.

What about McDonald's, Walmart increasing wages? Big deal, there is no wage inflation going on!

Economist James Galbraith wrote a great comment on the deeper anxieties of inflation hawks where he calls them out as they keep doubling down even though the evidence doesn't point to lasting inflation. 

The US bond market doesn't seem concerned about inflation and for good reason, it's non-existent:

Sure, CPI inflation might continue to surprise investors this week but this is transient, period. 

Also, I think the US dollar bears have a tough case to make, I'm quite confident the greenback is bottoming out here and if it comes roaring back, it will also quell any cyclical inflation pressures (higher USD, lower import, energy and commodity prices): 

As far as the Nasdaq, Dow and S&P 500, it's sideways actions as shares of Apple and Microsoft go nowhere but I did notice NVIDIA (NVDA) made an all-time high today:

Goes to show you, when in doubt, buy the big dips on NVIDIA, that's what Vanguard, BlackRock and Fidelity did and it paid off for them.

Alright, let me wrap it up there.

Below, Trey Collins, the host of the Trey’s Trades channel on YouTube, said that he believes the fundamental value of the company’s shares will be between $20 and $25 at the end of 2021.

Also, CNBC's Seema Mody reports on comments made by AMC CEO Adam Aron as the stock continues its volatile trading frenzy. 

Third, Austan Goolsbee, professor at the University of Chicago Booth School of Business and former Chairman of the Council of Economic Advisors, Diana Furchtgott-Roth, former acting secretary for economic policy at the Treasury Department, and Kate Moore, head of thematic strategy at BlackRock's Global Allocation Investment team, joined "Squawk Box" on Friday to discuss what the May jobs numbers could signal for US economic outlook.

Fourth, the 'Halftime Report' traders discuss Tom Lee of Fundstrat's call for the S&P to hit 4,400 in the first half and what today's jobs report means for the markets. 

Lastly, Kristina Hooper of Invesco says it's likely the Fed is heading in the direction of tapering and their "early and often" communication will help the markets feel comfortable with the idea. 

The Fed is already tapering, draining $485 billion in liquidity via reverse repos, undoing four months of QE. It's just keeping hush about that but market pros are paying attention. 

Update: Bloomberg reports AMC drama is exposing risks in $11 trillion world of indexing:

The remarkable surge in shares of AMC Entertainment Holdings Inc. and a handful of other stocks is showing up in multiple exchange-traded funds, skewing portfolios, altering risk profiles and exerting outsized influence on prices.

Take the $68 billion iShares Russell 2000 ETF (ticker IWM). In the past week through Thursday, AMC powered 70% of the product’s advance. The stock was responsible for less than a 10th of the fund’s return in the previous week.

It’s a timely reminder that even diversified funds on autopilot remain subject to the whims and eccentricities that frequently lash markets out of nowhere.

Always do your due diligence before buying any stock or ETF, this way you can avoid any unexpected surprises.

Lastly, while the "apes" and "diamond hands" are steadfastly holding on to their AMC shares (yeah right, more hedge fund nonsense!), I would heed the advice of Interactive Brokers' founder Thomas Peterffy who says the problem with AMC Entertainment memes: ‘People…will lose a very substantial amount of money’.

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