Melvin Capital, the US hedge fund firm caught up in this week’s short squeeze in GameStop, has been slashing its bets against European companies.
The New York-based firm, which takes punchy short positions and which has been singled out by day traders on Reddit, has cut its bet against German pharmaceuticals firm Evotec from 6.2 per cent earlier this week to 2.6 per cent on Thursday, according to regulatory filings and data group Breakout Point.
It has reduced its short position in battery maker Varta from 4.4 per cent to just under 0.5 per cent, and has also cut its bet against Polish video game firm CD Projekt.
Earlier this week Melvin was forced to seek a $2.75bn cash injection from Citadel and Point72 after suffering a loss of around 30 per cent.
US stocks fell on Friday in a broad sell-off that put Wall Street on pace for its worst week since the end of October, as a buying frenzy in shares of GameStop and other heavily shorted stocks triggered volatile month-end trading.
The benchmark S&P 500 fell 2.3 per cent in afternoon trading in New York, with all 11 sectors posting losses led by energy and technology groups. The tech-weighted Nasdaq Composite was also down 2.5 per cent.
The S&P 500 was on track to drop 3.7 per cent for the week. That would mark its biggest weekly retreat since a 5.6 per cent fall in the last week in October. The Nasdaq was headed for a 4.1 per cent drop this week, which would also be its steepest fall in three months.
GameStop shares were trading at $338.22 on Friday, a 75 per cent gain, after brokerages relaxed curbs that restricted investors’ ability to buy some stocks on Thursday. AMC Entertainment, which has also attracted the attention of retail investors this week, rallied 64 per cent.
The CBOE volatility index, known as the Vix, rose 6.3 percentage points to 36.5.
The yield on the 10-year Treasury note tacked on 0.02 percentage points to hit 1.071 per cent, as investors sold the debt.
The recent GameStop trading frenzy is “indicative of prior mania tops as far back as the South Sea Bubble of 1720” and should be investigated by regulators, according to famed fixed income manager Bill Gross.
The Pimco founder likened the short-squeeze to a “populist political uprising” and expressed concerns about the magnitudes of the moves and the pain expected to come when the market turns.
“While the Capitol of Capital has not exactly been stormed as in recent weeks, the will of the ‘common’ investor has imposed significant hurt on short selling, ‘unpatriotic’ hedge funds that have long profited at retail’s expense,” Mr Gross wrote in his latest investment outlook published on Friday. “My heart has been with Main Street for many years and there is no doubt that billions of dollars have flowed if only temporarily to the good guys. But the government cavalry is on the march and deservedly so.”
“There is justification to the cries from Senator Elizabeth Warren and future SEC Chairman Gary Gensler to control this new form of social media investing which in and of itself seems democratic, legal, and a wonderful invitation for groups of ‘investment clubs’ to innovate,” he added. “This apparent budding crisis needs regulatory warnings and mainstream media alerts as to the dangers this week, both to overall markets and individual investors.”
The value of European companies’ shares traded on US exchanges hit a record high on Wednesday during a frenzied week of trading, driven partly by in-demand stock Nokia.
According to a Morgan Stanley client note, volumes of American Depository Receipts of European companies hit $13bn on Wednesday. For the week turnover was $32bn, close to double the average since 2015.
Nokia, whose ADRs traded $13bn this week, has been one of the favoured stocks for retail investors to bet on in recent days. The ADRs, which were trading at $4.2 at the end of last week, soared as high as $7.35 on Wednesday, fuelled by interest on Reddit.
Ian Smith and Robin Wigglesworth
This week, the global stock market went down the Reddit hole.
A growing army of day traders has been a feature of the recovery in stocks since the sell-off last March, as a mixture of lockdowns, low interest rates and cancelled sporting competitions encouraged more and more everyday investors to try their hand at the equity market. This has accelerated since the start of 2021, as the Reddit message board, and its fast-expanding r/WallStreetBets community, have managed to channel the energy to a handful of previously unloved stocks.
The result has been a turbulent week for those shares at the centre of the action, which has spread to individual stocks around the world. Wild bouts of trading have triggered stock-exchange trading curbs and restrictions from brokers on what customers are allowed to buy.
Overall volatility in the stock market has increased, and people far beyond the finance industry have been transfixed by the battle between Wall Street and the have-a-go individual investor.
How did we get here? Read more here.
The more than $1bn investment announced by Robinhood is in the form of convertible debt, according to people briefed on the discussions.
The debt would convert at the lower of an implied valuation of about $30bn or a 30 per cent discount to the company’s upcoming initial public offering price, the people said. Ribbit Capital is leading the investment with Iconiq Capital. The two firms injected more than $500m in the company, some of the people said.
Other existing Robinhood investors are expected to put in the remaining capital by the end of today, the people added.
Robinhood referred the Financial Times to an earlier statement, which said: “This is a strong sign of confidence from investors that will help us continue to further serve our customers”.
White House press secretary Jen Psaki refused to be drawn into commenting on GameStop on Friday and told reporters that Joe Biden’s meeting with his economic team today would not be focused on the trading controversy.
“The focus of the meeting about the recovery plan, about the status of the economic recovery, about obviously the data that we saw yesterday. I am sure they will cover a range of topics during that meeting, but that is not the focus.”
She added: “I know it’s a big story but…our focus and our big story is getting the American people back to work.”
When pressed again, Ms Psaki referred to the SEC statement from earlier today, saying: “The US government is starting to work how it should. The SEC is a regulatory agency that oversees and monitors developments along these lines.”
Stephen Morris in London
As chaotic US stock trading resumed on Friday, JPMorgan sent an email to its investment banking staff about its personal account dealing (PAD) policy, reminding them that they are “obligated to adhere to its requirements and restrictions, even during the recent market volatility”.
The memo says that PAD is “geared towards long-term, non-speculative investing and the expectation is that you bear this in mind when engaging in personal investing activities”.
Staff should also “refrain from actual or perceived conflicts of interest that could arise due to their investment choices” and be aware they are subject to minimum holding periods, so may not be able to “immediately sell or buy” during big stock swings.
Furthermore, employees must “hold themselves to the highest standards of ethical conduct” and exercise “good judgement in the absence of a specific policy or procedure”.
One recipient summed it up more succinctly: “NO GAMESTONK”.
Another reason JPMorgan may be urging its staff to show restraint? They received their bonuses this week.
American Airlines is to sell $1.1bn of shares, capitalising on the market turmoil caused by the struggle between Wall Street and retail investors.
The Fort Worth airline said that it would sell the stock into the market over time. Goldman Sachs, Citigroup, Barclays and BNP Paribas are involved in the deal.
The airline’s stock was down 1.7 per cent in morning trading to $17.80.
American’s share price has surged in the past two days as small investors, many of whom trade stock tips and strategies on the Reddit forum r/WallStreetBets, have scooped up stock. American, a target of short sellers, is one of a number of companies the retail investors have seized upon after they routed hedge funds by fueling a run up in the share price of video game retailer GameStop.
The pandemic has battered airlines around the globe as travel restrictions have forced would-be customers to stay home. American reported an $8.9bn net loss for 2020.
American began selling equity into the market in October at an average price of $12.87 a share. The deal raised $882m. The airlines said yesterday in a filing that it planned to raise more money.
US regulators are investigating trading curbs put in place by brokers this week to limit the extreme volatility in certain companies’ share prices.
The US Securities and Exchange Commission said on Friday it was reviewing restrictions put in place by brokers to limit trading in certain stocks such as GameStop, which has been targeted by users of Reddit message boards in the hope of inflicting losses on hedge funds which have taken out bets against the company. GameStop’s shares rallied 66 per cent on Friday after the online brokerage Robinhood eased its curbs, leaving the company’s shares 118 per cent higher than where they started the week.
Herren Lee, the acting commissioner of the SEC, said in a joint statement with three other commissioners: “The Commission will work to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation.
“The Commission is working closely with our regulatory partners, both across the government and at Finra and other self-regulatory organisations, including the stock exchanges, to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing. The Commission will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”
GameStop rallied 72 per cent on Friday morning, rebounding from its first fall in six days after brokerages loosened trading restrictions.
The stock, which has become a favourite of Reddit users and other retail investors, jumped to $332.96 and wiped away its losses from Thursday, when it fell 44 per cent. GameStop roughly doubled in value at the start of the Friday session before trading was halted due to volatility.
Robinhood, the popular stock trading app, announced on Thursday that it would allow some purchases of GameStop and other stocks after previously limiting users’ ability to buy the shares.
Shares in AMC Entertainment and Express, two other stocks swept up in the Reddit-fuelled buying frenzy, also swung sharply higher on Friday.
Cinema chain AMC rose 45 per cent to $12.67. Express, the clothing retailer, was up 39 per cent at $6.51.
High growth companies should avoid public markets and instead seek private capital as stock markets and volatile sentiment make IPOs too risky, according to one of Europe’s biggest tech investors.
“In the past few months we’ve been trying to persuade companies not to go public or do [special purpose acquisition vehicles] because they may get completely the wrong kind of shareholders and build capital in the wrong way,” said James Anderson, who helps run the £17.5bn Scottish Mortgage Investment Trust.
Scottish Mortgage, run by asset manager Baillie Gifford, has over the past decade has become an unlikely star in the world of tech investing. Mr Anderson made his name betting big and betting early on high growth tech companies in Silicon Valley, such as Tesla, Facebook, Twitter and Netflix.
Mr Anderson said that his fund has taken long-term positions in high growth companies for decades. But he added that in the past two years, the money pouring in to growth tech has come from investors not looking to hold companies for the long term, but “because they think it’s going up in the short run.”
Mamta Badkar in New York
Citron Research will stop two decades of short selling analysis after getting caught up in this week’s frenzied trading that was aimed at squeezing investors out of their short positions.
Andrew Left, founder of Citron, has been one of the most outspoken short-sellers of video game retailer GameStop, whose share price surged in volatile trading this week.
“Twenty years ago I started Citron with the intention of protecting the individual against Wall Street, against the fraudulent stock promotions that were all over,” Andrew Left, founder of Citron, said on Friday.
“Now after 20 years we noticed something. When we started Citron was to be against the establishment, we’ve actually become the establishment… but it’s completely, now lost its focus. As of today Citron Research will no longer be publishing what can be considered short research reports,” he added.
Earlier this week Mr Left said the majority of Citron’s short position was covered when GameStop traded “in the $90s at a loss of 100%.”
Mamta Badkar in New York
Erik Riggiola, a customer at GameStop’s Union Square store in Manhattan, has little sympathy for the big investors who have been burnt by betting against the video game retailer.
The 49-year-old, who lost his job as an operations manager at a delivery company during the financial crisis, said Wall Street was getting a “taste of its own medicine”. But even Mr Riggiola had to admit that although GameStop was “not at the point of extinction”, it did look like a business that needed to adapt to keep up with the times.
Yet, in the past month, the struggling 37-year-old chain has gone from a share price that averaged around the $18 mark before the trading frenzy began, to a record intraday high of $483 on Thursday and a $28bn or so market capitalisation that exceeded Halliburton, Kellogg and about half the companies on the S&P 500. Though the stock later retreated sharply amid volatile trading.
The reason for the exuberance is, in part, the hope for a potential turnround led by new board member Ryan Cohen, co-founder of online petcare business Chewy. But a much larger factor has been a co-ordinated effort among amateur traders to bet against the short sellers who make money by buying shares that they think will fall.
Read more on the company at the heart of the price action here.
The price of silver rose by 4 per cent on Friday, a day after a user on Reddit’s WallStreetBets forum urged people to buy shares in a leading silver exchange-traded fund to create a “short squeeze” in the market.
The price of silver rose to $27.4 an ounce in morning trading, following a 6 per cent rise in the shares of the iShares Silver Trust on Thursday.
On Thursday user u/TheHappyHawaiian said buying shares in the ETF would “force physical delivery of silver” into its vaults, thereby causing a “short squeeze” on the market, pushing up the silver price. That would present problems for traders who were short silver on the futures markets, they said.
“The people naked shorting silver via the futures markets are a couple of large banks and making them pay dearly for their over leveraged naked shorts would be incredible,” the user said.
Silver surged by as much as 7 per cent on Thursday while the price of the iShares Silver Trust ended the day $1 above its net asset value due to the influx of buying.
Analysts at Commerzbank, however, said that the impact on silver was likely to be muted, given the large size of the silver futures markets.
“We are confident that the influence of retail investors on silver will not last all that long, and that ultimately industrial and institutional demand will be the key factor in the longer term,” they said. “That said, the latest price surges are likely to see financial market participants focus more on precious metals again.”
Shares in silver miners also rallied on the news on Thursday with New York-listed First Majestic Silver up by 22 per cent. The miner was targeted by a series of Reddit users on Thursday calling for a “short squeeze” against those betting on a decline in the stock.
Stefania Palma in Singapore
Shares in the world’s biggest rubber glove maker jumped as users of a Reddit forum rallied behind the under-pressure group, as the surge in online retail investor activism in the US spread abroad.
Malaysia-based Top Glove’s stock jumped as much as 14 per cent on Friday after Reddit users called on retail investors to buy the shares.
The emergence of online investor activism in the south-east Asian country echoed that in the US. Users of r/WallStreetBets, a Reddit forum of more than 5m, have co-ordinated this week to propel into the stratosphere shares in games retailer GameStop and other companies that were the target of hedge funds’ bearish wagers.
“Our glove companies, with whatever imperfections they have, are our national treasure . . . they are our pride,” wrote Revenant, a moderator of the r/BursaBets subreddit, which has signed up almost 7,000 members since it was set up on Thursday.
Shares in Top Glove and other Malaysian glove makers soared throughout much of 2020 as the coronavirus pandemic boosted demand for personal protective equipment. But their stock prices have fallen following the successful development of Covid-19 vaccines.
Read more here.
Mamta Badkar in New York
Shares in video game retailer GameStop are up nearly 70 per cent in pre-market trade on Friday after online brokerage Robinhood eased trading restrictions.
The shares ended 44 per cent lower on Thursday during a volatile session in which brokers temporarily restricted buying on certain so-called meme stocks that have been targeted by traders on Reddit message boards in hopes of inflicting losses on hedge funds that have placed large bets against the same shares.
Robinhood, which faced political backlash after it moved to restrict trading on certain securities yesterday, has raised more than $1bn from its existing investors and tapped credit lines from banks to shore up its financial position. Late on Thursday the company said it would “open up trading for some of these securities in a responsible manner” and the announcement sent GameStop shares more than 60 per cent higher in overnight trade.
GameStop, BlackBerry and AMC have been among the companies that day traders have pushed up because they are the subject of large short bets by hedge funds. The video game retailer also had a small number of free floating shares, which makes it hard for investors looking to cover their shorts.
It has been a wild week on Wall Street. GameStop has made the headlines, but others such as AMC, Express and American Airlines have also been volatile.
The heavy trading has spread to commodities such as silver and even a Malaysian maker of rubber gloves, while politicians, regulators, lawyers and celebrities have all weighed in with their views.
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