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February 02, 2021
Five Things
Bloomberg

Democrats move on stimulus, vaccine progress, and Reddit favorites lose ground. 

Budget reconciliation   

House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer introduced a budget resolution yesterday, the first step in a process called budget reconciliation which would allow much of President Joe Biden's $1.9 trillion stimulus plan to pass the Senate with just a simple majority. The move does not mean that hopes of a bipartisan agreement are dead, with yesterday's meeting between the White House and Republican senators dubbed "very productive." 

Vaccines 

The vaccination program in the U.S. has hit a significant milestone with the number of people receiving at least one dose of a Covid-19 shot now larger than the total number of infections reported in the country. The deputy director of the Center for Disease Control and Prevention signaled the outbreak may have peaked, saying: "If this pandemic were a stock, we might be wanting to sell." The benefits from a rapid rollout of vaccines is clear in the U.K., where the pound has rallied strongly as investors grow more optimistic about the prospects for the economy. In Europe, meanwhile, German Chancellor Angela Merkel is trying to reassure citizens on the availability of vaccines amid the region's slow rollout. 

Over?

The massive move in GameStop Corp. shares last week seems to be fizzling out. Shares in the video-game retailer are 23% lower in premarket trading with trading volume and short interest shrinking. Silver is also well off yesterday's highs, with the metal dropping below $28 an ounce this morning. While it's probably too early to tell if the moves are over for now, it is already clear that once the dust settles regulators are going to take a closer look at social media's role in mobilizing investors. The House Financial Services Committee has scheduled a hearing for Feb. 18 which will look at the role of regulators and firms such as Robinhood Markets in the recent volatility. 

Markets rise

Equity markets are on the rise again today as U.S. moves on stimulus and continued good news on the vaccine front help lift investor sentiment. Overnight the MSCI Asia Pacific Index added 1.3% while Japan's Topix index closed 0.9% higher. In Europe the Stoxx 600 Index had gained 1.2% by 5:50 a.m. Eastern Time with every industry sector in the green. S&P 500 futures also pointed to a strong open, the 10-year Treasury yield was at 1.105%, oil rallied to a one-year high and gold slipped. 

Coming up...

Today's calendar is brought to you by the letter A, with Alphabet Inc., Amazon.com Inc. and Alibaba Group Holding Ltd. all reporting earnings. Autosales data for January is released later. Dallas Fed President Robert Kaplan and Cleveland Fed President Loretta Mester are scheduled to speak. Treasury Secretary Janet Yellen meet Senate Democrats to discuss Covid relief. Oil earnings season continues with Exxon Mobil Corp. and ConocoPhillips announcing results. 

What we've been reading

This is what's caught our eye over the last 24 hours. 

And finally, here's what Joe's interested in this morning

It's possible that the GameStop trade is coming to an end, but there's no doubt that for a long time people are going to be talking about what it all means for markets, politics, society and everything. On the latest Odd Lots podcast, Tracy Alloway and I spoke with George Pearkes of Bespoke Investments and Jill Carlson of Slow Ventures about some of these themes.

One of the popular things you hear a lot of people saying is along the lines of: "Hedge funds have been winning a rigged game for so long, and now it's the little guy's chance to do the same thing." While David vs. Goliath stories are irresistible, one of the problems is that hedge funds really haven't been dominating the game for a long time. Here's an academic paper, for example, talking about their "lost decade". Numerous articles have been written about the "death of hedge funds" or the "death of 2 & 20" precisely because taken as a whole they haven't done anything special. (Of course there are numerous exceptions.)

There are lots of theories why, but one of my favorite explanations comes from longtime investor and writer Michael Mauboussin, who has talked a lot about how the rise of passive investing has chipped into manager returns. The basic idea: The average performance of all participants in the market, by definition, has to equal the overall market returns. If some players in the market produce superior returns (like 12% in a year when the S&P gained 8%) then by definition, other players had to underperform.

With the rise of passive strategies over the last several years, we've seen a number of market players migrate away from bad strategies to ones that delivered them the market return. As such, the slow disappearance of the small fish in the market has led to the slow disappearance of underperforming players, meaning that the sharks, the pros, have had fewer opportunities to produce market-beating returns. Imagine a poker table with all amazing players, and no weak players. They can't all do well. The fewer weak players at the table, the less easy profit there is available for the better ones.

So now to Wall Street bets and Robinhood and all that. It's being framed as this chance to get back at the big players. And there's no question that some big investors suffered some serious body blows these past couple of weeks. But taken as a whole, the hedge fund industry should relish the return of more active participants because, frankly, many of them won't be good at it. Pro investors may have to adjust their strategies. This phenomenon of flash-mob buying or buying in packs is probably not going to go away, meaning we'll have more GameStops or at least mini-GameStops in the future.

But it seems plausible that the rise of retail we've seen accelerate in the last year means the pond has been freshly stocked with fish, a potential new source of energy for a hedge fund industry that hasn't been thriving of late.

Joe Weisenthal is an editor at Bloomberg. 

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