HOT AIR BALLOON FLIGHT

By Julia Horowitz • Tuesday, October 19

Good morning. In today's newsletter: A new report on GameStop mania is full of interesting findings about the meme stock craze. Plus, America's biggest container port faces a huge backlog, and why Zillow is under pressure.

 

US stock futures are up after the Dow finished lower on Monday. Markets in Europe gained in early trading, following stocks in Asia. Oil prices keep rising, with Brent crude futures, the global benchmark, above $85 per barrel.

 

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MARKET FLASH

What actually happened during the GameStop boom? 

 

In late January, there was one question on the minds of investors: How did a struggling mall-based video game retailer became Wall Street's hottest stock, seemingly overnight?

 

Now, after months of research, the industry's top regulator has answers — and its findings could pave the way for major reforms to how financial markets function as amateur traders remain a powerful force.

 

What's happening: The US Securities and Exchange Commission just released a 44-page report examining GameStop mania, the early 2021 phenomenon in which the company's shares, plugged by enthusiasts on social media, rocketed about 2,700% in a matter of weeks.

 

Other companies, including movie theater chain AMC Entertainment, electronics company Koss and clothing chain Express, also logged astronomical gains as online hype reached a fever pitch.

 

The report is full of interesting findings about the so-called "meme stock" craze. Here are some of the highlights.

 

It really was wild. The SEC found that the number of unique accounts trading GameStop on a given day rose to nearly 900,000 by Jan. 27, up from fewer than 10,000 at the beginning of the month.

 

And the volume of stock changing hands was massive. Between Jan. 13 and Jan. 29, an average of 100 million GameStop shares were traded per day, up 1,400% from the 2020 average.

 

The action wasn't just limited to GameStop. More than 100 stocks "experienced large price moves or increased trading volume that significantly exceeded broader market movements," the SEC said.

 

Some theories were off. One reason GameStop generated so much attention was because it fit a compelling David versus Goliath narrative, in which a band of renegade traders coordinating on platforms like Reddit successfully took on big hedge funds that had placed bets against GameStop. When the company's share price rose dramatically, those hedge funds allegedly had to buy stock in the company to cover their positions, triggering even bigger gains.

 

That did happen. But the SEC found that "such buying was a small fraction of overall buy volume," and that it was "positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock."

 

Robinhood is under the microscope. The SEC thinks regulators should take a closer look at how popular trading apps function. That could put pressure on the company, which went public in July.

 

"Consideration should be given to whether game-like features and celebratory animations that are likely intended to create positive feedback from trading lead investors to trade more than they would otherwise," the report said.

 

The SEC also said the practice at the center of Robinhood's business model, known as "payment for order flow," could compel the company to find "novel ways to increase customer trading." 

 

When an investor places an order to buy a stock on its app, Robinhood routes the order to a market maker like Citadel Securities, which then handles execution — and pays Robinhood for that privilege. SEC Chair Gary Gensler has previously indicated he's skeptical of payment for order flow.

 

Big picture: The report didn't include specific policy recommendations. But it could help Gensler's SEC eventually make changes to how markets function. 

 

"January's events gave us an opportunity to consider how we can further our efforts to make the equity markets as fair, orderly and efficient as possible," Gensler, who was nominated by President Joe Biden, said in a statement Monday. 

 

But SEC Commissioners Hester Peirce and Elad Roisman, who are Republican appointees, said in a separate statement that the report went too far.

 

"In the wake of an anomalous market event, it can be tempting to identify a convenient scapegoat and leverage the event to pursue regulatory actions without regard to the factual record," they said, adding that the report, "finds no causal connection between the meme stock volatility" and a practice such as payment for order flow "that has drawn recent popular attention."

VOICES

US lawmakers say Amazon may have lied to Congress

"We strongly encourage you to make use of this opportunity to correct the record and provide the committee with sworn, truthful and accurate responses to this request."

 

LETTER TO AMAZON CEO ANDY JASSY

 

Read more from CNN Business.

SUPPLY CHAIN MONITOR

America's biggest container port is bursting at the seams

America's busiest container port needs to process a massive shipping backlog, and fast.

 

The latest: Approximately 200,000 shipping containers are stuck off the coast of Los Angeles as pandemic-related disruptions continue to weigh on supply chains, Gene Seroka, the port's executive director, told CNN's Jake Tapper.

 

"We have about two weeks' worth of work sitting at anchor right now," Seroka said Monday.

 

The warning is a reminder of the problems retailers face heading into the holiday season, their busiest period of the year. Consumers are eager to spend, but stores are struggling to get products on shelves as supply chains remain badly tangled.

 

"We've been buying more than ever as American consumers and the retailers have really tried their best to keep up with demand," Seroka said. 

 

Last week, President Joe Biden announced the Port of Los Angeles would move to a 24/7 operating schedule. While this has alleviated some of the congestion, Seroka said problems are expected to persist for months as companies try to restock depleted inventories.

 

Remember: JPMorgan Chase CEO Jamie Dimon thinks supply chain problems and their effect on the economy have been overhyped.

 

And while he's right that shoppers are still spending — US retail sales in September grew 0.7% from the month earlier — other executives don't think the situation is as transitory as Dimon has implied.

 

Most chief financial officers think disruptions will last "until the second half of 2022 or later," according to a recent survey from Duke University's Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta.

 

Shipping issues are shaving an average of 5% off of corporate revenue growth, said John Graham, a Fuqua finance professor.

UP NEXT

BNY Mellon, Ericsson, Johnson & Johnson, Philip Morris International, Procter & Gamble and Travelers report results before US markets open. Netflix and United Airlines follow after the close.

Also today →
▸ US housing starts and building permits for September post at 8:30 a.m. ET.

▸ The first bitcoin futures ETF launches on the New York Stock Exchange.

▸ Google unveils its Pixel 6 smartphone at 1 p.m. ET.

 

Coming tomorrow: Earnings from Verizon, IBM and Tesla.

WHAT WE'RE READING AND WATCHING

▸ LiveNation's stock soars as concerts return (CNN Business)
▸ Rent the Runway targets $1.5 billion valuation in IPO (WSJ)
▸ Apple reveals new Macs and next-gen AirPods (CNN Business)
▸ Shortages hurt America's factories last month (CNN Business)
▸ Treasury warns digital currencies could weaken US sanctions (NYT)
▸ China's economic wobbles cast long shadow for Asia (Reuters)

FINAL WORD

The housing market is hot. So why is Zillow's stock plunging?

Demand for homes around the world remains strong, as potential buyers with savings from the pandemic look to upgrade their pads.

 

So why did stock in Zillow, which is known for its real estate listings, just plummet 9%? 

 

Breaking it down: The company said Monday that it would stop buying homes to flip for the rest of the year as it works through a cache of properties already purchased.

 

"We're operating within a labor- and supply-constrained economy inside a competitive real estate market, especially in the construction, renovation and closing spaces," Jeremy Wacksman, Zillow's chief operating officer, said.

 

Zillow launched its home buying program, known as Zillow Offers, in 2018. It now operates in 25 cities. The company uses data and algorithms to make a cash offer for properties and re-lists them after doing minor work. 

 

But Zillow seems to have gotten ahead of itself. It bought 3,805 homes in the second quarter — a record high and more than double the number bought in the first quarter, according to a note to shareholders. Now it needs to offload much of that inventory.

 

Watch this space: This may not just be a case of corporate mismanagement, however. Analysts at Bank of America think the announcement may be an important signal about where the market is headed. 

 

"We believe Zillow's decision might be affected by slowing [home] sales and [the] company's inability to sell through at the same rate at which it is acquiring as buyers take a step back," they said in a note to clients.