As we begin to wave goodbye to Summer, it seems fitting that we can quote the summertime movie Jaws, "just when you thought it was safe to go back into the water."
Just when you thought meme stocks were done, we witnessed retail investors get caught up again in the frenzy this week. The recent action reminds me of the song by the Little River Band, "Lonesome Loser." The song was released in 1979 and unlike most of the band's other hits, this song was written by David Briggs. The song topped out at #6 on the U.S. charts, but only reached #19 in Australia - the band's country of origin. In fact, the Little River Band was much more successful in the U.S. than in their home country. Based on the market action in meme stocks this week, the song's lyrics seem eerily appropriate:
“Unlucky in love, least that’s what they say
He lost his head and gambled his hear away
He still keeps searching though there’s nothing left
Staked his heart and lost, now he has to pay the cost
Have you heard about the lonesome loser
Beaten by the queen of hearts every time
Have you heard about the lonesome loser
He’s a loser, but he still keeps on tryin’”
Here's what we've seen so far this week...
Have You Heard About The Lonesome Loser? It all started back in early July when Bed Bath & Beyond (BBBY) ousted their CEO, Mark Tritton, after his "turnaround plan" failed to produce the desired results. In stepped venture capitalist and GameStop (another meme stock) Board Chairman Ryan Cohen. On Tritton's departure he commented, "I'm sick of seeing failed executives make millions in risk free compensation while shareholders are left holding the bag." Cohen began buying up shares of BBBY in mid-January and pushed the stock price up to 552% from July 27th to August 17th.
Then, he quietly filed two days ago to sell all of his 9.5 million shares in BBBY stock, along with his RC Ventures Hedge Fund. As a result, the price of the stock has plummeted 62% over the last couple of days. The point of all of this is not whether the stock has good fundamentals or whether it should be purchased or sold. The point is that individual investors should stick to a sound investment strategy, consult with their financial professional, and avoid investing in any security based on a posting on a blog site. Apparently, Cohen is not so concerned about shareholders, now that he has pulled the rug out from under them on Bed Bath & Beyond.
He's A Loser, But He Still Keeps On Tryin'. Equity markets have pushed higher over the past two months, mainly on the hope that a Fed pivot would come soon.
We have belittled that notion consistently as markets continue to price in further rate hikes. The implied futures for Fed Funds Rate is projecting rate hikes through March of 2023. Whether that equates to two 50 bps hikes and one 25 bps hike or some other variation, yields are likely headed higher. In fact, the yield on the 10-year and 2-year Treasuries moved lower from June 1st to August 1st.
That trend, however, has reversed and 10yr yield has increased 28 basis points so far in August. The release of the Fed's July meeting earlier this week seemed to be interpreted by the market as "dovish" at first, but the reality of future rate hikes appears to have set in. On Tuesday, the S&P 500 Index attempted to break through the 200-day moving average (red line as shown in the graph above), but quickly bounced off the highly-watched metric and proceeded lower. For the past two days the index has closed lower, which could indicate a retesting of lows in the coming weeks. We will have to wait and see. Investors would be wise not to follow the crowd at this point and stick to a long-term investment strategy.
He Still Keeps Searching Though There’s Nothing Left. There are fewer and fewer fundamentals to justify current stock prices.
Jobless claims beat expectations last week, but were still elevated. The NAHB Housing Market Index proceeded below 50 last month, which indicates contraction in the housing market. Housing Starts plummeted to two-year lows and Building Permits, though they slightly exceeded expectations, still dropped in July to 9-month lows. Mortgage Applications declined last week by 2.3%, which is the 9th decline in the last 14 weeks. The manufacturing data was mixed this week.
The Philly Fed Manufacturing Index actually surprised in July, but the NY Empire State Index plummeted to -31.3, which is the lowest level since the pandemic began. Retail Sales were flat (0.0%) in July, which was the 6th time in the last 9 months that sales have come in below expectations. There are two sides to this coin - if sales decline, then inflation is likely to have peaked; but, if sales continue to decline, that means we are likely in a recession. Where the consumer goes (two-thirds of U.S. GDP), so goes the economy.
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