Tag: WSJ

GameStop Is a Bubble in Its Purest Form

Mary Pat Campbell

Link: https://www.wsj.com/articles/gamestop-is-a-bubble-in-its-purest-form-11611756239?mod=djemwhatsnews

Graphic:

Excerpt:

The scale of trading in GameStop shares is as extraordinary as the daily gains in price, suggesting widespread disturbance to people’s judgment. On Tuesday, $22 billion of shares changed hands, more than in Apple, the world’s largest company, and double GameStop’s market value. Adam Smith, the founder of economics, called speculative manias “overtrading,” and this is what they look like.

The hope of getting rich is only part of what is inflating the bubble. Mr. Kindleberger argued that speculative manias needed innovative sources of financing, and the private traders on r/WSB have one: the shift last year to make trading in options free on Robinhood and several other platforms.

Author(s): James Mackintosh

Publication Date: 27 January 2021

Publication Site: Wall Street Journal

Junk Has Never Been So Valued

Mary Pat Campbell

Link: https://www.wsj.com/articles/junk-has-never-been-so-valued-11612915150

Excerpt:

If you’re an over-leveraged company at risk of default, now’s your moment to load up on more debt. The average yield on U.S. junk bonds dropped below 4% for the first time on Monday amid a market scavenger hunt for higher returns.

The Federal Reserve has pushed down long-term interest rates by buying bonds and committed to keep short-term interest rates at near zero through 2023. While the central bank’s interventions were needed in March, it continued to buy corporate bonds well into the summer when markets didn’t need the support.

Author(s): WSJ Editorial Board

Publication Date: 9 February 2021

Publication Site: Wall Street Journal

Why Brokers Had to Restrain Trading in GameStop Shares

Mary Pat Campbell

Link: https://www.wsj.com/articles/why-brokers-had-to-restrain-trading-in-gamestop-shares-11612201242

Excerpt:

When clients trade, especially on margin, they use the broker’s money to play. Imagine a client buys 100 shares of GameStop for $400 a share, using $20,000 of his own money and borrowing $20,000 from Robinhood. If the stock drops from $400 to $120 (as it did on Jan. 28), the client’s position may be sold for $12,000 due to the margin violation, leaving Robinhood trying to collect an unsecured $8,000 debt. Good luck. Multiply this by hundreds or thousands of similar clients. Option trading is worse because the leverage is much greater.

The broker’s risk is asymmetrical: If half its clients are winning big by buying during a short squeeze, while its short clients are suffering losses they can’t pay, the broker can’t offset these gains and losses, but must pay the winning clients while possibly eating the losing trades. It is rare, but brokers go bankrupt during market events like this.

Brokers therefore are subject to strict financial requirements, including that they maintain large security deposits at the clearinghouses. When risk rises, clearinghouses raise their requirements, even intraday. On Jan. 28, when GameStop dropped from $483 to $112, the clearinghouse DTCC raised requirements by an aggregate $7.5 billion. Brokers had to post that money to DTCC whether or not their clients had it.

Author(s): David Battan

Publication Date: 1 February 2021

Publication Site: Wall Street Journal

Trucking Failures Surged Last Year Under Pandemic

Mary Pat Campbell

Link: https://www.wsj.com/articles/trucking-failures-surged-last-year-under-pandemic-11612827527

Excerpt:

U.S. trucking-company failures nearly tripled in 2020 from the previous year as fallout from the pandemic deepened pressure on smaller operators while well-capitalized bigger truckers held on and found stronger financial footing as the economy reopened.

Some 3,140 fleets shut down last year, a 185% jump from 2019, according to transportation industry data firm Broughton Capital LLC. Roughly half of the 2020 failures came in the second quarter, when freight volumes plummeted amid widespread shutdowns aimed at limiting the spread of Covid-19.

Author(s): Jennifer Smith

Publication Date: 8 February 2021

Publication Site: Wall Street Journal

New York Lawmakers Float Crackdown on Hedge Funds’ Sovereign-Debt Tactics

Mary Pat Campbell

Link: https://www.wsj.com/articles/new-york-lawmakers-float-crackdown-on-hedge-funds-sovereign-debt-tactics-11612780201

Excerpt:

Some New York lawmakers are planning legislation designed to blunt hedge funds’ ability to resist sovereign-debt restructurings, while easing financial settlements for government borrowers in distress.

New York state Sen. Gustavo Rivera and Assemblywoman Maritza Davila, both Democrats, plan to introduce legislation as soon as this week to allow a supermajority of a nation’s creditors to amend or restructure its debt contracts and bind any dissenters that could otherwise hold out.

Many sovereign bonds in Latin America, Africa, and other emerging markets contain collective-action clauses that require all creditors to honor agreements that a majority of them make with the borrower. But others lack such mechanisms, leaving no ready way for settlements made with majority support to become binding on all members of a creditor class.

…..

A risk of the legislation is that investors would sue to challenge it because it could retroactively change certain contracts already in place. Changing contract rights can be justified under certain circumstances, if doing so advances a compelling state interest.

Author(s): Alexander Gladstone

Publication Date: 9 February 2021

Publication Site: Wall Street Journal

Connecticut Democrats Push Governor to Raise Taxes

Mary Pat Campbell

Link: https://www.wsj.com/articles/connecticut-democrats-push-governor-to-raise-taxes-11612717200

Excerpt:

A group of progressive Democratic lawmakers last week called on the governor, also a Democrat, to declare a fiscal emergency, and proposed a $3 billion legislative package of new spending on education, property-tax relief, a one-time stimulus payment of $500 for people who lost their jobs during the pandemic, and other measures.

Lawmakers proposed paying for these new spending items by raising taxes on the wealthy and on corporations to produce more than $4 billion in new revenue annually. The proposal includes establishing a 5% surtax on capital gains for individuals making more than $500,000 annually and raising the state’s top income-tax bracket to 12.696%, the second highest in the nation after California.

Author(s): Joseph De Avila

Publication Date: 7 February 2021

Publication Site: Wall Street Journal

Covid-19’s Hit to State and Local Revenues Is Smaller Than Many Feared

Mary Pat Campbell

Link: https://www.wsj.com/articles/covid-19s-hit-to-state-and-local-revenues-is-smaller-than-many-feared-11612706030

Excerpt:

Immediately after the coronavirus outbreak last March, states slashed revenue projections by an average of about 8%, with some expecting shortfalls as high as 20%. Those projections were largely based on experiences during the 2007-09 recession.

In the end, state revenues fell 1.6% in fiscal year 2020 and were 3.4% lower than projected before the pandemic, according to the National Association of State Budget Officers. While states expect revenues to decline 4.4% in fiscal 2021, 18 states are seeing revenues come in above forecast.

Author(s): Kate Davidson

Publication Date: 7 February 2021

Publication Site: Wall Street Journal

GameStop Frenzy Is Tough Call for Regulators Focused on Transparency

Mary Pat Campbell

Link: https://www.wsj.com/articles/gamestop-frenzy-is-tough-call-for-regulators-focused-on-transparency-11612693802

Excerpt:

One reason regulators might be stymied is a lack of political will to limit trading by small investors. When Robinhood temporarily blocked its customers from trading GameStop shares during the frenzy, a cry went up about market access. The big losses those little guys inflicted on some hedge funds by bidding up the stock was seen as a democratization of the market. Any effort to derail that could be criticized as protection for Wall Street.

“Most people believe that middle-class people, working people, should be able to take their chances on the stock market,” Rep. Maxine Waters (D., Calif.), who leads the House Financial Services Committee, said in an interview.

The consensus among regulators so far is that the episode didn’t expose major problems with the market’s plumbing. The Treasury Department said Thursday that regulators believe the market’s “core infrastructure was resilient.” The department said the SEC is reviewing “whether trading practices are consistent with investor protection and fair and efficient markets,” and is expected to release a report on the factors that influenced it.

Author(s): Paul Kiernan and Dave Michaels

Publication Date: 7 February 2021

Publication Site: Wall Street Journal

Slow Covid-19 Vaccine Rollout, New Variants Shift Some Business Plans

Mary Pat Campbell

Link: https://www.wsj.com/articles/slow-covid-19-vaccine-rollout-shifts-some-business-plans-11612702801?mod=djemwhatsnews

Excerpt:

Consumers are unlikely to resume travel, dining out and shopping in stores at a pre-pandemic cadence until later this year, chiefs of some large companies told Wall Street analysts and investors in recent weeks. Some CEOs said consumer activity could pick up as soon as spring. Others pointed to a recovery later in the year—or even 2022.

“Let me underscore that progress on economic growth is contingent on an effective vaccine rollout program globally,” said Goldman Sachs Group Inc. CEO David Solomon. “In its absence, economic recovery will be unnecessarily delayed.”

The pandemic has unevenly bolstered and derailed growth prospects; divided workforces into staff able to shelter at home and those who must report in person for duty; and reshaped consumer purchasing as stay-at-home orders change. The rapid shifts have complicated financial forecasts and made consumer behavior hard to predict.

Author(s): Sarah Krouse

Publication Date: 7 February 2021

Publication Site: Wall Street Journal

A California Plan to Chase Away the Rich, Then Keep Stalking Them

Mary Pat Campbell

Link: https://www.wsj.com/articles/a-california-plan-to-chase-away-the-rich-then-keep-stalking-them-11608331448?st=eciwz3atsygqzun&reflink=article_email_share

Excerpt:

California’s Legislature is considering a wealth tax on residents, part-year residents, and any person who spends more than 60 days inside the state’s borders in a single year. Even those who move out of state would continue to be subject to the tax for a decade — a provision that calls to mind the Eagles’ famous “Hotel California” lyric: “You can check out any time you like, but you can never leave.”

The California Constitution probably allows a statewide wealth tax on residents, but any effort to create a tax capable of reaching across state borders is likely to run afoul of the U.S. Constitution. Taxing someone who spends only 60 days in the state in any single year — and extending that tax over an ensuing decade — would be something new under the sun.

Author(s): Hank Adler

Publication Date: 18 December 2020

Publication Site: Wall Street Journal

GameStop Mania Drives Scrutiny of Payments to Online Brokers

Mary Pat Campbell

Link: https://www.wsj.com/articles/gamestop-mania-drives-scrutiny-of-payments-to-online-brokers-11612434601

Excerpt:

The Reddit-fueled frenzy in stocks such as GameStop Corp. and AMC Entertainment Holdings Inc. is prompting calls for regulators to reconsider a decades-old practice in the U.S. stock market: payment for order flow.

The practice, in which high-speed trading firms pay brokerages for the right to execute orders submitted by individual investors, has long been controversial. Some have said it warps the incentives of brokers and encourages them to maximize their revenue at the expense of customers. Supporters, including many brokers and trading firms, said it helps ensure investors get seamless executions and good prices on trades.

Last year, brokerages such as Charles Schwab Corp., TD Ameritrade, Robinhood Markets Inc. and E*Trade collected nearly $2.6 billion in payments for stock and option orders, according to JMP Securities. The biggest sources of the payments were electronic-trading firms such as Citadel Securities, Susquehanna International Group LLP and Virtu Financial Inc.

Payment for order flow helped set the stage for the manic trading in GameStop, whose shares began the year around $18, surged to a record close of $347.51 on Jan. 27 and ended Thursday’s session at $53.50. Other once-hot stocks such as AMC and Koss Corp. fell more than 20% on Thursday as the Reddit rally lost steam.

Author(s): Alexander Osipovich

Publication Date: 4 February 2021

Publication Site: Wall Street Journal

States Pressure Drugmakers After McKinsey’s $600 Million Opioid Settlement

Mary Pat Campbell

Link: https://www.wsj.com/articles/states-pressure-drug-makers-after-mckinseys-600-million-opioid-settlement-11612476966

Excerpt:

State attorneys general intensified pressure on drug companies to settle claims over the opioid crisis, following consulting firm McKinsey & Co.’s agreement to pay nearly $600 million over its advice to pharmaceutical companies to rev up sales.

McKinsey’s settlements, reached with every state but Nevada, are an unexpected first source of revenue to stem from yearslong investigations into drug-industry players that states say helped exacerbate an opioid epidemic. It has killed at least 400,000 people in the U.S. since 1999.

“We do not want to be in litigation for years on this, spending money and resources while people are dying,” Colorado Attorney General Phil Weiser said Thursday. “We want to get fair settlements now. Others need to follow suit.”

States have been negotiating since 2019 with the nation’s three largest drug distributors, McKesson Corp., AmerisourceBergen Corp., Cardinal Health Inc., as well as drugmaker Johnson & Johnson. The companies have publicly disclosed that they have set aside a collective $26 billion for the deal, most of it to be paid over 18 years, but no final agreement has been reached.

Authors: Sara Randazzo and Jonathan Randles

Publication Date: 4 February 2021

Publication Site: Wall Street Journal