A Short Squeeze

A short sale occurs when an investor sells a stock they don’t own to hopefully buy it back later at a reduced price. Recently, Gamestop and AMC have seen a short squeeze. When you short a stock, if the stock price increases, you must make a margin deposit, that is, make an additional deposit of cash into your account, or repurchase the stock and take the loss. In a short squeeze, a group of investors buy the stock, forcing short sellers to make more deposits or take a loss. In the past two weeks, Gamestop has gained about 1,800 percent, which in our opinion, means the stock is in a bubble.

Buyback Increase

During the COVID-19 lockdowns, corporate cash flows dropped dramatically, which led to a decline in both dividends and stock buybacks. Now, companies are beginning to discuss an increase in buybacks. Buybacks in the fourth quarter of 2020 were $116 billion, up from $102 billion in the third quarter. For 2021, buybacks are expected to reach $651 billion, a big jump from 2020's $505 billion.

COVID-19 Bankruptcies

As we mentioned in the textbook, financial leverage is a double edged sword. With the COVID-19 lockdowns, the economy slowed dramatically and the effect on highly leveraged companies was immediate. During 2020, 244 U.S. companies with liabilities over $50 million filed for bankruptcy. This was a 70 percent increase from 2019, and the most since 2009's 293 filings. In what may be more telling, during 2019, 62 percent of companies reported being a net investor. However, by the fall of 2020, only 52 percent of companies reported being a net investor.

Dividend Payments Resuming

A recent Wall Street Journal article highlights part of the economic recovery from the COVID-19 shutdowns. In the spring, 42 S&P 500 companies announced dividend suspensions. To date, six of these companies have announced the resumption of dividends, and several others have announced a timeline for doing so. For example, Kohl's announced that it intends to resume dividends in the first half of 2021 after a smaller revenue drop compared to the previous quarter. Likewise, General Motors expects to resume dividend payments in mid-2021.

VC Hits Record

Even though economic shutdowns from COVID-19 have slowed the economy, it hasn't affected the venture capital market. Andreessen Horowitz closed two $4.5 billion funds, increasing the total venture capital raised in 2020 to $69.1 billion, surpassing the previous record of $67.8 billion raised in 2018. However, there were 589 VC funds started in 2018, but only 287 VC funds started in 2020. As the numbers show, there are fewer, but larger, VC funds started. 

McRib Investing

Although many people love the McRib, an even more important discovery has been made: You can make money investing in the stock market by investing in the McRib! Surely we jest, and we do. A recent article highlights the McRib effect, that is, the stock market as a whole has a higher return when the McRib is avialable. While this is a fact, as the article points out, there is an important distinction between causality and correlation. And while the McRib anomaly may tickle your ribs, it does highlight that many market analysts will tell you why the stock market rose or fell on a particular day. Most, if not all, are inferring causality when only correlation is present. 

COVID-19 Stock Trading

In a positive announcement in the fight against COVID-19, on Monday, Pfizer announced a vaccine that is more than 90 percent effective. That day, Pfizer's stock rose about 10 percent. But a strange thing happened: Albert Bourla, the CEO of Pfizer, sold $5.6 million of the company's stock. The stock sale was part of a 10b5-1 plan. A 10b5-1 plan allows company executives to prearrange stock sales with a broker to avoid the appearance of insider trading. In Bourla's case, the 10b5-1 plan was put in place on August 19. However, some have scrutinized Bourla's plan as on August 20th, the company had a press release announcing new Phase 1 testing date.