Ah February First, the sweet smell of Spring is in the air, even in Minnesota. Baseball will soon start with the Pitchers and Catchers reporting shortly. Football will be over in a week and NASCAR begins with the Daytona 500 in two weeks.
This past week we saw the rise of a new type of Hedge Fund, I will call it The Reddit Army. While there is no single fund manager associated with the Reddit Army, they have banded a significant amount of funds together and are moving in concert. They also chose the opening battle of the war carefully targeting a stock that was the focus of short selling, but also with a limited amount of outstanding stock available so a market could be made in it. As of Saturday morning the shorts still have a massive position in the Gamestop stock. There was 113% of the Gamestop stock covered by the shorts. It is coming down to who will blink first, the Hedge Funds or the Reddit Army? Because the Reddit Army has the stock, they can wait out the Hedge Funds. Once the Hedge Funds start to purchase the funds needed to buy back the stock shorted, or the options related to the shorts, the stock price may rise again, further pinching the shorts who hold on. Once the short positions are sufficiently relinquished the price will start to drop and will drop precipitously as the Reddit Army then starts to sell out their position. There will be big winners and big losers on both sides. However in any war, the collateral damage will be the ones to watch for. Investors in the hedge funds, Gamestop employees and others who may not have known their family member was part of the Reddit Army, and did not know their savings were at risk.
Since it is the First, the ISM Manufacturing report will be out later today. My prediction is that it will be at or slightly above 60 again. The manufacturing sector is showing great strength. The Fed manufacturing reports for January that have come out were healthy, on par with December numbers. The strongest was Kansas which nearly doubled the December number. Chicago and Dallas were slightly under December but within a margin of error.
Durable Goods for December showed strength when you pulled out the transportion and defense numbers. The transportation number was suspect as more and more manufacturers worldwide are curtailing production due to the chip shortage which started in November. The defense number was off as Boeing reported really bad numbers. Their sales are still off even though the 737 Max was cleared for flight. Buyers continue to sit on the side line not wanting the see if the plane is fixed. At the same time flights were down over 60% in 2020 and are not climbing back quickly. Most airlines have plenty of capacity and do not need new planes.
President Biden is rolling back some of President Trumps Executive Orders much like President Trump did to President Obama. Unless Congress acts to instill something into Law, any Executive Order is temporary. In the case of the orders related to the oil industry, the re-assessment of the Keystone Pipeline, the restriction of drilling on Government land or fracking on government land, the thinking is supply will eventually be impacted. Saudi Arabia curtailed supply production last month which drove the price of oil up to $55.00. This produced the result of another increase in oil rigs in the US. We are now about to breach the 300 rig mark after bottoming out beneath 200 not long ago. Supply continues to grow as demand is not picking up. Working from home, shopping on line instead of in person, and avoiding trips, including short vacations, are all putting a damper on demand. The moral here, instead of instituting regulations that kill jobs, you might be better served to let the market settle where low demand will cut production.
Have a great week.