The Overnight Report: Call The Regulator

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By Greg Peel

Was that really necessary?

The ASX200 fell two percent yesterday because Wall Street fell two percent. What’s happening in America right now is so far removed from our market it’s ridiculous, but hey, sell now, ask questions later.

As the complier of FNArena’s weekly Short Report for many years, and having published the first report for 2021 only yesterday, I can tell you that in my experience the Australian stock market has never been so minimally shorted. The list of stocks shorted by 5% or more used to typically run over a page. Today it’s half a page.

Two things stand out that highlight the folly of yesterday. Firstly, a microcap miner called GME Resources ((GME)) jumped 13% for reasons management could not explain. GME is the US code for GameStop.

The other is that overnight, the Dow has bounced back 400 points and our futures are up 69 this morning. There was nothing fundamental about Wall Street’s fall on Wednesday night. There was no fundamental reason for the ASX to tank either.

But that didn’t stop some punters trying it on.

Amidst the carnage, which saw all sectors carted bar utilities (+0.3%), Webjet ((WEB)) rose 1.5%, Inghams Group ((ING)) 4.4%, InvoCare ((IVC)) 5.7% and UR-Westfield ((URW)) 14.5%. Webjet is the most shorted stock on the ASX at 14.5%, Inghams is at 8.6% and InvoCare at 8.0%.

UR-Westfield is only 3% shorted here, but a strong rally overnight in the UK suggests it may well be more heavily shorted over there.

But if you think these “short squeeze” attempts, mimicking Wall Street, were the reason the ASX200 dropped -130 points you’re wrong. Try blind investor panic, both fuelled and exacerbated by momentum algos, and, I would posit, intelligent investors simply staying the hell out, making buyers hard to find.

Technology was the worst hit sector yesterday (-4.8%) and of course it was – more mimicking of Wall Street. Sell the high-flyers to cover losses on short positions. What short positions? Afterpay ((APT)), for example, fell -6%.

Falls of -2.2% for energy and -2.5% for materials were on-trend but there are fundamentals behind these two sectors, as noted yesterday, being S&P putting global oil & gas companies on negative credit watch and China planning to cut steel production. Iron ore is down another -5.7% this morning.

The worst individual index performance was reserved for fund manager IOOF Holdings ((IFL)), because it provided a quarterly update revealing further funds outflows. IOOF fell -10.6%.

Following the rebound on Wall Street overnight, our futures are calling for around a 50% rebound today. Presumably a lot of investors will be badly whipsawed.

Bad luck.

A Stable Market?

US retail stockbrokers last night moved to restrict trading in several stocks, being those featuring in the short squeeze such as poster boy GameStop. This has sparked much anger among the retail players, accusing brokers of moving the goalposts mid game.

But there is a very viable reason to do so. With said stocks running up four-digit percentages in a short space of time, there are going to be big winners and big losers, which is both true right now and will be true again when suddenly the music stops.

What if the losers, particularly those trading on margin loans, can’t pay? Then it’s up to the broker to pay the winners and cop the loss. What if a broker can’t cover the losses? Then it’s up to the clearing house to pay. While a clearing house, and brokers, carry provisions for such consequences, if the clearing house can’t pay, the market collapses.

And now, as one would expect, US lawmakers have weighed in. Regulation inevitably runs way behind the present day. The laws governing short selling were passed in the 1930s and have not been updated since. The current short squeeze would not have been possible twenty, maybe even ten years ago. Technology has made it so.

Many, but not all, of the short squeeze stocks that I highlighted yesterday of having jumped 100-400% on Wednesday night last night fell -30-50%. Well, ho hum, you say. But that’s top-down. Your investment in AMC Entertainment is this morning worth half of what it was the previous morning. Meanwhile, the pack is searching for other short squeeze candidates.

While all this transpires, US earnings season continues. Last night Wall Street reacted to earnings beats posted in Wednesday night’s aftermarket by all of Apple, Facebook and Tesla. All fell slightly last night, despite the general market rebound. All have been called overvalued by many.

A first estimate suggests the US economy grew by 4.0% in the December quarter, netting America’s 2020 GDP contraction to -3.5% — the biggest fall since 1946. While no one was much surprised, it had been hoped a more robust recovery would be underway by now, but covid has seen to that.

Does last night’s rebound, at least half was back, suggest this bout of volatility is over? No. The Dow was actually up over 600 points at one stage, implying a full rebound. And whether or not this short squeeze game ultimately ends in tears, there remains a strong belief Wall Street is simply due a correction, and this sort of non-fundamental volatility may just be the trigger.

Commodities

Copper appears to copping the brunt of some base metal selling, but is another asset that has run very hard recently.

As is iron ore.

The oils seem content to sit things out for the time being.

Having fallen -1.4% on Wednesday on the resource sector news, the Aussie has last night bounced back 0.6% to US$0.7694 on a slip in the greenback.

Today

The SPI Overnight closed up 69 points or 1%.

Australia will see numbers for December quarter PPI and month of December private sector credit today.

The US will see personal income & spending data and PCE inflation.

ResMed ((RMD)) reports earnings.

Origin Energy ((ORG)) and OZ Minerals ((OZL)) report quarterly production.

Metcash ((MTS)) goes ex.

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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