Daily Brief: Meme Stocks Are No Joke, But Hedge Funds Might Have The Last Laugh

Daily Brief: Meme Stocks Are No Joke, But Hedge Funds Might Have The Last Laugh

over 2 years ago3 mins

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So-called “meme stocks” have been front and center of investors’ minds this month, and it pays more and more to know which stocks are going to the – well, you know.

What does this mean?

The meme stock craze that first kicked off in January is back again: GameStop and AMC Entertainment – two of the highest-profile winners the first time around – have now seen their stocks rise 1,500% and 2,227% respectively this year. And they’re not the only ones to have benefited from an influx of Reddit-inspired retail investors: an unprofitable Korean power plant manufacturer, a US medical insurance firm, a private prison operator, and a wrestling entertainment powerhouse have all seen their share prices make big strides.

Meme socks

Why should I care?

For markets: Meme stocks aren’t just fun and games.

GameStop might not have expected this opportunity to land on its lap, but it’s serious about taking full advantage now that it has: the retailer’s been using its cult following to raise cash this year, and it’s just announced a new CEO and CFO, both from Amazon. The hope is that a rejuvenated bank balance and savvy ecommerce execs at the helm will improve the fundamentals of its business, turning it from “just” a meme stock into a real heavy-hitter.

The bigger picture: Meme stocks might be running out of gas.

Meme stock hunters particularly like stocks that other investors are “shorting” – i.e. betting will fall in value. After all, those investors are likely to reverse their bets if the stock starts to rise, which just adds more fuel to the rally. But major short sellers have wised up since January, and they’re no longer so open about which positions they’re taking. That’s making it harder for meme stock hunters to find opportunities, and might kill off the meme theme as soon as it began.

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The ECB Left Its Support Program Unchanged

ECB image

The European Central Bank (ECB) announced it’d be leaving its coronavirus economic support plan in place on Thursday, in hopes it’ll keep investors sleeping soundly.

What does this mean?

Besides keeping its key interest rates unchanged, the ECB also said it’d continue buying government and company bonds to the tune of some $2.2 trillion until at least March next year. That boost in demand for eurozone bonds has helped keep everyone’s borrowing costs low, and should continue to. But now that the annual rate of price rises is overshooting the ECB’s target of just under 2% (even if only temporarily), there’s an argument that Europe should slowly start to remove its economic training wheels – just like America’s doing.

New ECB forecasts

Why should I care?

The bigger picture: The US is running hot, hot, hot.

The ECB’s update was followed by fresh data that showed American consumer goods and services cost 5% more last month than they did in May last year. That was higher than expected – the highest since 2008, in fact, or 1992 if you strip out often-volatile food and energy prices. But inflation should cool down on both sides of the Atlantic soon: the pandemic was still wreaking havoc this time last year, which means price growth is bound to look high in comparison. Things started getting back to normal in July though, so investors will find it a lot easier to tell if central banks’ hold-steady strategies are justified from next month on.

CPI

For markets: Consistently high inflation could be bad news.

There are two possible outcomes should inflation remain stubbornly high. If things get too expensive, people may spend less, which would slow economic and company earnings growth and send stock prices spiraling. Alternatively, central banks could step in and raise interest rates in a bid to limit further price rises. That would make new, higher-returning bonds more attractive, and encourage investors to sell both stocks and older bonds to buy them instead.

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