January 29 2021
1. JobSeekers staying on top…
The team have been intrigued by the high net increase in JobSeeker benefit recipients since March 2020 as compared to the nearly normalised number of Australians either unemployed or outside the labour force, see chart below. It is interesting to note this divergence as companies begin to hand back their JobSeeker payments after they reaped the benefits of Covid shopping trends, and other businesses feel the ‘ESG pressure’ to do so as well. We expect the upcoming reporting season may provide more detail on what companies who have benefited from JobSeeker payments plan to do with the excess stimulus.
2. Australia approved a COVID vaccine!…
Following an independent review, the Therapeutic Goods Administration has given the Pfizer vaccine the green light this week, paving the way for those aged 16 and older to get the jab in Australia from late February.
We are taking hope from the early positive impact the vaccine has had on infection rates in the elderly Israeli population. They also used the Pfizer jab, and new infections and hospitalisations were down c.60% from their peaks with some evidence of protection evident from around day 13.
3. The Reddit army has arrived… and we thought speculation was in last week!
What seemed to have started with a misspelt tweet from Elon Musk earlier in the week turned into an all-out war between hedge funds and Reddit users! And the newest US stimulus cheques haven’t even hit letter boxes yet.
We’re sure you’ve seen the news on this over the week, so we’ve rounded up some interesting learnings from the team:
- The Sheriff of Nottingham came to town last night and rounded up retail traders, as the Robinhood platform stopped taking orders in the stocks pushed into the stratosphere, resulting in widespread anger, and potential lawsuits (it is the US!). The two stocks at the forefront of the move, GameStop and AMC Entertainment, were down ~36% and ~55% respectively as hedge funds could still freely trade…more to come on this.
- Wednesday was the highest volume day in the US since 2008 (since Bloomberg data was recorded). On Feb 28 2020, the S&P opened down 5% with 19.3bn shares traded as Covid gripped the world. This Wednesday went even further, as retail investors combined with Institutional/hedge funds to trade over 23 billion shares! AMC entertainment was nearly 1.2 billion of those traded, despite only having ~356 million shares on issue!
- We learnt about ‘borrow recycling’, which is how the GameStop short interest went over 100% of free float! As a guide Australia’s most shorted stock is WEB (Webjet) at 14%
- Word on the street was that Tuesday was the worst alpha day in the history of L/S equity hedge funds, then Wednesday got even worse, with ‘funds down 20%, 30%, 40% MTD…’.
- Demonstrating just how distorted the market got this week, the relatively small Australian mining company called GME Resources soared more than 50% at one point Thursday in an apparent case of mistaken identity. It shares the same ticker as GameStop, but in Australia – GME US vs GME AU (see charts below).
- All this excitement came after global equities saw record inflows over the last 3 months!
The Firetrail approach to shorting (with the Absolute Return Fund)
We are highly cognisant of the big risks of shorting. These include:
- Taking large stock specific bets – we have a highly diversified short book (over 100 securities) consisting of fundamental shorts + risk shorts (to reduce portfolio risk and market exposure)
- Shorting crowded shorts – we explicitly avoid shorting crowded shorts – anything with a short interest >7% is excluded in our risk short portfolio and fundamental shorts with higher Short Interest have a much higher hurdle applied to them. This helps to avoid BIG shorts squeezes like what you are seeing now (for example in AU TWE and URW both being squeezed)
- Managing the time-frame – In our fundamental shorts – we manage the timeframe very closely and have key earnings catalysts we look for. Usually 4-6 weeks before reporting season we will put a fundamental short on to profit from an earnings downgrade – and we close it out very soon after the event to avoid corporate activity and management reactions to improve share price post downgrade. For earnings catalysts outside reporting season – we need the catalyst to occur within 9 months. We don’t hold fundamental shorts long term.
- Focus on earnings – not valuation – We focus explicitly on earnings downgrades or catalysts – NOT valuation. Just because a company looks expensive, doesn’t make it a good short. If companies keep delivering, share prices will follow the earnings / momentum of the business. You can get into a lot of trouble waiting to be right on a valuation based short (think Tesla, CSL etc)
- As a result of our robust approach, the Firetrail Absolute Return Fund was not impacted at all by the retail stampede in highly shorted stocks. In fact, our short book actually added over 1% in January