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With the country following with bated breath every new development in the war between WallStreetBets and Wall Street, and specifically how an army of angry teenagers which targeted a handful of bearish hedge funds and steamrolled them into submission with trillions in excess liquidity, some are wondering what’s next: after all there is only so much you can do with a handful of very shorted stocks (while even Wall Street is now trying to muscle in on the less shorted stocks with recos to buy these) after you have ramped them up and down and then back up again. What’s the endgame.

Indeed, there is a sense that this trend is starting to get a little tired, and the most shorted names themselves are trading near session lows (although the latest round of Robinhood restrictions which laughably permits just 2 shares of bitcoin be purchased certainly has something to do with this).

So what next?

Here we respectfully bring to the attention of r/wallstreetbets something they may have missed in their search for shortable equities: move to futures, where on asset stands out. According to the CFTC’s latest Traders in Financial Futures report, the net short position in bitcoin futures is now the biggest it has ever been.

What better way to hammer those evil hedge funds than to follow up the “short” colonoscopy with a moonshot in bitcoin, which leads to even more billions in losses.

Furthermore, now that Elon “#Bitcoin” Musk has shown just how much clout he has in the space, when one tweet…

In retrospect, it was inevitable

— Elon Musk (@elonmusk) January 29, 2021

… he pushed bitcoin up by 15%, or almost $100 billion in minutes, a little strategic coordination between the world’s most popular reddit forum and the world’s richest man should successfully push the world’s most valuable cryptocurrency above $100,000 in just a few days.

By Michael Every of Rabobank

Game Over or Game On? (and Hamsters)

This is still not an equity-focused Daily; yet it still can’t avoid talking about what just happened. Wednesday saw the forum for the ‘Redd-olution’ shut down, then belatedly reopened; a massive spike in the share-price of GameStop, as the retail horde crushed hedge fund short-sellers with another incredible spike into bubbleville; then the online broker they transact with, Robinhood, decided all trading in GameStop and a few other key stocks was to be sell only, with the broker de facto becoming a regulator; and so the price of said stocks then reversed dramatically, wider stocks rallied, US and global bond yields rose, and the USD weakened as risk went back on.

On one level this is indeed Game Over. The House wins. The Empire Strikes Back. ‘Sanity’ prevails. And, yes, we should not be encouraging retail investors to manipulate markets and pile into obvious bubbles with stimulus cheques “because markets”.

However, on another level this is Game On. The retail horde are not going anywhere, and may have no day jobs to go back to. They have been defeated here, but can pile into any stock or asset they choose, forcing brokers or regulators to shut down trading, making life hard for The Street, and a mockery of the system. Moreover, they have political support: when AOC and Ted Cruz and Donald Trump, Jr. all agree the system is rigged, you know something is happening.

The easy to grasp political meme is that the ‘sanity’ now restored is one of infinite liquidity and light touch regulation for established market players –so hedge funds can short more than 100% of a stock (which is the market ‘genius’ the Redd-olution first spotted) or buy 100-year Argentinian bonds, or go long tech that bleeds money– but means bankrupting rule-changes and a heavy regulatory hand for retail punters trying to cut out the middle men. Over 40 years we still haven’t seen any political action to reverse the collapse in US real wages that has led people to need to day-trade for a living or retirement; but it took just 48 hours to act to save hedge funds. With zero irony, Steven Cohen, who runs hedge fund Citadel that does Robinhood’s trades for it, even tweeted: “I’m just trying to make a living just like you”(!) Yet what is the real political solution?

Back in 2015, when China’s equity bubble was imploding, I used the analogy of my mum’s hamster, which was always escaping from its cage. She had responded by progressively blocking each side of the cage with 12” LPs, but the thing always found a way out from the open sides. When all four were covered, and she was considering entombing it with an LP on the top of the cage too, I told her to either accept it was going to escape, or not have a hamster at all. It’s no surprise if you understand political economy and Minsky, but the US in 2021 echoes China in 2015. Vast amounts of liquidity are being thrown at a system that does not produce the “desired” outcomes: and the response is to micromanage where the liquidity flows, rather than accepting that hamsters gonna hamster.

In China’s case, this is part of their system, which despite cycles of mini-booms and busts and increasingly inefficient capital allocation, also produce massive output gains; and as long as Minsky isn’t gonna Minsky, which means as long as external trade is never gonna deficit, this is sustainable, even if an external political backlash is inevitable. By contrast, the US is the home of individual and market freedoms, yet we see the same trend of trying to stop the hamster escaping, while feeding it purely on speed: is an internal political backlash inevitable?

At least China has central planning, with markets there to help: in the US we have central planning with no plan other than “because markets” (but not these markets; or like that; or by you).

However, moving from the micro to the meta, that can change. In the US there is a shift to national security focused on China, which gives central planners broad lines for market activity to then colour within – albeit on less of the page than they could doodle on before. Moreover, a Green New Deal is a major focus for President Biden and the same analogy holds there. The two sets of broad lines could look very similar, or very different.

On which, yesterday China’s official spokesperson stated: “China is willing to work with the US on climate change. But such cooperation cannot stand unaffected by the overall China-US relations. It is impossible to ask for China’s support in global affairs while interfering in its domestic affairs and undermining its interests.” So climate czar John Kerry may have nothing to do with Beijing after all; or lots and lots. Just don’t forget the lobbying US Big Tech executives are already doing to decouple from China.

But back to our current ‘sanity’, where Bloomberg op-eds roundly cheer the end of the first stage of the Redd-olution (after all, these kind of people don’t even pay for terminals!) and herald that “Hedge Funds’ Trades Are Working Again After Worst Day in History”. So nature is healing, and it’s time to buy 100-year bonds from repeat defaulters and/or loss-making tech companies again.

Back to your wheels, people!

While every TikTok-ing Millennial and their emotional-support-rabbit has been glued to the meltup in heavily-shorted stocks like GME (and the meltdown in the hedge funds who were heavily-short), there has been significant impacts under the covers of the rest of the financial markets that few have (for now) noticed.

Yes, FANG stocks (and the most liquid names held by hedgies) have seen liquidations to meet margin calls, the outsized influence from the booming video-game retailer has altered some ETF compositions and is forcing what Citi analysts call “ad-hoc rebalances and strategy adjustments.”

In a rather stunning move, Bloomberg reports that investors have pulled roughly $700 million from the SPDR S&P Retail ETF (XRT) this week, draining total assets to just $164 million.

Source: Bloomberg

The outflows come after GameStop’s surge swelled its weighting in XRT to 20% – given that the fund tracks an equal-weighted index, the video game retailer’s weighting should be closer to 1%.

Bloomberg notes that theories abound as to what motivated the outflows, given that they happened alongside a nearly 20% rally in XRT this week alone.

One possibility is that because XRT redemptions are delivered in-kind – meaning that its shares are exchanged for the underlying stocks in the fund – investors are ditching the ETF to get their hands on hard-to-borrow GameStop shares.

“GameStop’s surging borrow rates signal high demand for the shares, with short-selling hedge funds potentially seeking to close or adjust positions,” wrote BI analysts James Seyffart and Eric Balchunas in a report Friday.

“The in-kind redemption was likely an attempt by investors to get their hands on scarce GameStop shares.”

Others posit that with such a heavy weighting to the highly volatile GameStop, some holders may be choosing to take profit.

“Anyone who was long XRT BEFORE all this started had a reason. Whatever that reason, it WASN’T to gain from a mechanical pop in a meme stock that happened to be inside,” Dave Nadig, chief investment officer at data provider ETF Trends, wrote in an email. “So it’s pure 100% profit taking.”

Additionally, as Citi’s Scott Chronert recently wrote, GME’s sharp move in the past month “has increased its prominence in a variety of ETFs. Users of the ETFs highlighted within, whether for long or hedging purposes, should be aware of the outsized influence that GameStop’s price action can have on their positions.” 

Citi also warned to “take special note of ETFs that incorporate leverage.” The bank screened for ETFs with a greater than 3% exposure to GME and found that Niche Thematic, Equal Weight Industry, and differentiated, more concentrated Small Cap portfolios stand out. Among the ETFs highlighted are the following”

In parting, the bank cautions that “rebalance dates should be considered when assessing the GameStop influence going forward”, urging clients to “note the ETFs where GameStop has become a much larger allocation following its sharp move. This may significantly change fund performance and use case suitability until rebalance dates.”

Specifically, among the Traditional small and mid-size and style indexes with exposure to GME the bank listed: IJS, SLYV, SPSM, SLY, IJR, IJT, SLYG, IWN, BBSC, IWM, SCHA, PBSM, VIOV

Simply put, the fallout from GME (and others) runs this week is far from over as even potentially ‘passive’ investors face dramatically increased volatility.

Authored by Tom Ozimek via The Epoch Times (emphasis ours),

Democrat lawmakers on Thursday introduced a bill dubbed the “Vote at Home Act,” which seeks to “massively expand vote-at-home ballot access,” enacting automatic voter registration and providing voters with pre-paid ballot envelopes.

Sen. Ron Wyden (D-Ore.) and Rep. Earl Blumenauer (D-Ore.) introduced the bill (pdf), saying in a press release that the legislation is meant to “fight voter suppression.”

“Our democracy is stronger when every American can vote, without standing in ridiculous lines or having to take time off work or school to exercise their Constitutional rights,” Wyden said in a statement.

The initiative stands in contrast to a bill introduced by Republicans several weeks ago, which seeks to tighten voter registration verifications and narrow rules for when and how mail-in ballots can be accepted, in a bid to strengthen the integrity of federal elections.

The Democrat lawmakers said the introduction of the bill was encouraged by what they described as “the successful expansion of voting at home and by mail in the November 2020 election,” in which almost 50 percent of voters cast ballots by mail, a record high in federal races.

“Last year we saw a widespread expansion of vote-at-home access as a safe and secure way to participate during the COVID-19 pandemic,” Blumenauer said in a statement. “We should continue to make voting easier, not harder. This important bill would strengthen and clarify the right to vote at home, the most secure and convenient way for voters to exercise the franchise.”

Critics of expanding vote-by-mail initiatives have warned of the increased potential for voter fraud, allegations of which were front and center in the contested presidential election, with President Donald Trump, members of his legal team, and supporters, making numerous claims that amounted to the charge that the election was stolen.

Peter Navarro, who served as an adviser to Trump, concluded in a sweeping report on the integrity of the 2020 election that the allegations of irregularities, including outright voter fraud, were serious enough to warrant an urgent probe and substantial enough to potentially overturn the results.

State election officials, the Justice Department, and others rejected the notion that there was widespread voter fraud in the November election.

The Democrats’ “Vote at Home Act” stipulates a range of actions that would expand vote by mail in federal elections.

“All registered voters would receive ballots in the mail weeks before Election Day, allowing them to carefully research candidates and issues well ahead of Election Day to inform their vote,” the press release states.

The bill would also grant all registered voters nationwide the ability to cast their ballots by mail or at ballot drop boxes. The act also calls for increased funding for the U.S. Postal Service to cover costs associated with processing ballots.

“This would allow states to save money by transitioning away from polling stations and reduce a major barrier for voters with the federal government absorbing the cost associated with USPS delivery,” the press release notes.

Under the provisions of the bill, states would also be required to automatically register voters when they provide identifying information to the state motor vehicle authority. Voters who do not want to remain registered would be given three weeks to opt out.

The House Republican bill, meanwhile, called the “Save Democracy Act,” seeks to create baseline protections against election irregularities and voter fraud during elections.

The GOP initiative seeks to prevent automatic voter registration for federal elections, prohibits states from sending out unrequested absentee ballots, and calls for a ban on using public ballot collection boxes.

Rep. Jim Banks (R-Ind.), said in a press statement, “This bill will restore the public’s trust that their vote is counted and their voice is heard.”