Al Jazeera: Give the People What They Want

In the begining of the Showtime series The Loudest Voice, about Roger Ailes and the rise of Fox News,  Ailes gives Rupert Murdoch some advice about cable news channel: "Cable is about one thing: niche." And for Ailes that niche was Conservatives. As he saw it, the network news programs, CNN and MSNBC were all fighting over the same liberal base. He wanted to capture and keep the big conservative base everyone else was dismissing. "We are just gonna give the people what they want."

And the strategy worked fantastically. Ailes and Fox News reshaped American politics and paved the way for Trump and MAGA nation, all the while making huge sums of money for Murdoch's NewsCorp., including $12B of revenue just in 2020. Fox News became the top rated cable news network in January 2002, less than 5-years after its launch, and had held on to that spot until last month. Losing out to CNN and MSNBC in the coveted primetime slots.

In addition, total day ratings (Mon-Sun, 6a-6a) was just as weak. CNN averaged 1.9M viewers per day in January, MSNBC 1.6M viewers and Fox News 1.3M viewers. And on the day of the U.S. Capitol insurrection, CNN averaged 5.9M viewers, MSNBC 4.5M viewers and Fox News a dissapointing 3.4M viewers.

Well, we know why: Fox News is no longer the only alternative cable news source for the roughly 40% of the electorate that identifies as conservative. After calling Arizona correctly, but early, for Biden on election night (even as uber-liberal MSNBC waited), the channel angered Trump supporters and some of its most fervant viewers have since migrated to even more conservative channels like Newsmax and the OAN Network...Now, add Al Jazeera to the mix? Yes, that's right, that Al Jazeera. The Qatar-based, Arabic, channel is starting a conservative online digital media platform called Rightly. Its purpose is to generate content for "those underrepresented in today's media environment." Okay, if you say so.

Al Jazeera's first foray into America in 2013, via the now-defunct Al Jazeera America through the acquisition of the progressive station Current TV cost the company $2B. So now they are trying their hand at the other end of the political spectrum. Al Jazeera has deep pockets and there are shrewd political reasons for the Qataris to want to more closely align themselves with conservatives. But we'll see if Rightly is seen as credible by disaffected Fox News viewers...perhaps they'll bring on Megyn Kelly, Bill O' Reilly, Lou Dobbs or Glenn Beck.

Inflation Head Fake?

The financial markets freaked out last week as yields rose on fears, yet again (sigh), of growing inflationary pressure. The benchmark 10-yr Treasury yield briefly crossed 1.6% Thursday, the highest level in a year, sparking a sell-off in Growth and Momentum stocks. But so what? The 10-yr was back at only pre-Covid levels, and everyone knew those stocks were grossly overvalued...Yes, the 12-month CPI came in at 1.4% in Jan vs the average of 1.2% for 2020. And true, there is another $1.9T of stimulus on the way even as the economy is poised to take-off (Goldman Sachs is forecasting ~7% GDP growth for 2021). From that angle, you might expect some handwringing in the media about inflation... though sell-side research loves to cheerlead remind clients rising yields is good for stocks as it reflects strong fundamentals (there's never a bad reason not to own stocks).

But, what seemed to really have panicked the markets was the disorderly nature of the bond sell-off. The magnitude of the move last week was more than 2 standard deviations, which is typically associated falling equity prices. So last week both bonds and stocks lost value together. The nightmare scenario from a portfolio construction perspective! Anyways...continuing with what happened...Goldman Sachs' Portfolio Strategy team notes that long-duration growth stocks fared especially poorly, including a 15% sell-off in a basket of non-profitable tech stocks that had risen by 230% since the start of 2020. In contrast, cyclicals with falling sales in 2020 have returned +25% YTD. There was also the chart below, which got a lot of attention showing the 10-yr was now yielding as much as stocks and signaling potentially more outflows out of stocks as investors re-think their income source:   

But we've been here before...as the above chart shows, including famously in 2013 with the "Taper Tantrum." Each time growth has been slower than expected and inflation way lower than anticipated. I'm with PIMCO's Dan Ivascyn, who continues to see "powerful disinflationary trends. [And] after an initial recovery there is likely a world of excess capacity." In Ivascyn's opinion, inflation will remain contained due to secular trends in demographics, technology and weakness of organized labor. The upshot is a material risk of an "inflation head fake." 

Moneyball: The Financialization of Self

I don't follow baseball all that closely (except maybe in October), but this headline in the WSJ certainly caught my eye: The Padres Owe Fernando Tatis Jr. $340 Million. He Owes an Investment Fund Millions From His Payday.

Sure, $340 million is an impressive number...but what's really interesting is the second part of the headline. Four years ago, when he was 18 and just a (very) promising prospect, Tatis signed a contract with Big League Advance, an investment fund that pays "minor-league players money up front in exchange for a share of their future MLB earnings." Titas now owes BLA perhaps $30 million.

BLA is essentially a venture capital fund, but instead of investing in promising startups they invest in promising baseball prospects. It is run by Michael Schwimer, a former MLB pitcher, whose years in the minor leagues inspired him to start BLA to help struggling players. Minor league players are notoriously underpaid. A typical AAA ball player (one step below the Majors) makes around $2,500/ month-- but that's only during baseball season, so on an hourly level they actually make below minimum wage; it's by no means a glamorous life. By contrast the average MLB player makes $4.4 million/ year.  Schwimer aims to help these players by investing in them today. 

BLA uses advance predictive analytics (think Moneyball) to spit out a price per percentage point. For example, they may advance $100,000 for 1% of a player's MLB contract or $500,000 for 5%. BLA usually takes 8-10% stakes in a players' (potential) future big-league earnings, but can do less or more. So far, they have invested $150 million in nearly 350 players. 

Problem is, only 10%-20% of minor league players make it to the "Show." So, like a VC fund, BLA will lose money on most investments--remember this not a loan, but an equity transaction; players owe nothing if they don't get a MLB contract...But every once in a while a homerun like the Titas deal will subsidize the other transactions and provide a nice return for BLA's investors. The below chart explains the basics (click to enlarge):

Like any financial innovation it works by transferring risk...from players to investors...All good, as long as the players fully understand what they are getting into. When you hit it big, giving up a nice chunk of pre-tax earning can hurt.

From an investor's point of view, it is quite attractive, because returns are truly uncorrelated. What happens in the S&P 500 is not really going to impact what happens in baseball. The exit environment is also less cyclical and investment horizons shorter...most players who make it to the MLB will do so within 3-4 years. 

There are similar "income-sharing" mechanisms for university students. It's a fascinating topic (with multiple dynamics like majors and university rankings) that deserves it own post. There is also "income-pooling" from groups like Pando, which itself is a modern version of communal committees. All work on the same principle of risk-sharing. For now, it'll be interesting to see if this deal spurs more investments and in other sports as investors clamor for uncorrelated returns.

Cold Case: Malcolm X

Civil rights activist Malcolm X was assassinated on Feb 21, 1965 at Manhattan's Audubon Ballroom by three gunmen. All three were from the NOI organization. Now, new evidence hints at a conspiracy involving the NYPD and FBI.

Texas Deep Freeze = Big $$$ for Jerry Jones

To paraphrase...one state's misfortune can be someone else's opportunity...As Texas is gripped by a devastating winter storm, Cowboy's owner Jerry Jones is making a tidy profit. 

While the freezing conditions forced other power plants to shutdown, Jones' Comstock Resources remained operational as gas prices skyrocketed. And Comstock executives aren't hiding their excitement about the profits they're raking in. In a tone-deaf statement to analysts, CFO Ronald Burns boasted that "this week is like hitting the jackpot with some of these incredible prices...Frankly we were able to sell at super premium prices for a material amount of production."

Comstock's share was up 21% over the past week. Yes, some of that was due to better than expected Q4 results, but the market is always forward looking and the CFO's not-so-subtle intimation was that Q1 is looking real good too-- thanks to the storm. Jones owns around 70% of Comstock. The company's market cap rose from $1.19B to $1.44B last week; translating to $175M in personal gain. Not bad, not bad at all.

Look, Jones didn't cause the crisis...and his company, to its credit, remained functional while many others couldn't. And this map would probably look even worse without the gas Comstock was providing...But maybe not be so gleeful, publically. 

After all, there are a lot Cowboys fans in those red and orange counties...and they are getting bills like this from their gas providers or worse:

  

(And also...when you aggressively de-regulate you increase the chances of this type of debacle. Left to pure profit maximization, companies are simply not going to prepare for tail-risk events like this...that cost a lot of money and are a negative carry most of the time.)  

Krugman vs Summers: The Stimulus Debate

This is more a discussion than a "debate" between two giants of the economics profession. Both are Democrats and agree on the basics, though Krugman is more of a center-left/ Keynesian economist, while Summers' leanings are more center-right with a natural sympathy towards market forces.

Anyways, Summers generated a quite a bit of stir in policy circles a few weeks back when he questioned the size of Biden's proposed $1.9T stimulus package, particularly the need for $2,000 of stimulus checks ("stimis"). We wrote about this before. In short, Summers' argument was that the data showed that due to a combination of people returning to work, government support of various kinds and stimulus checks, aggregate income in the US was only $30B below pre-pandemic trend. So, he contends, by continuing with unemployment benefits (~$300B), more PPP (~$300B), Covid aid to state and local governments (~$300B) and some additional aid (~$100B) we only require about a $1T of support. So why the need for almost double the amount and so much direct cash payments? 

Summers would rather see the additional $1T or so go to infrastructure investments rather than sent out as checks which will go to a lot middle and high-income households that don't need it and likely won't spend it (because, as shown in the chart below, they didn't in the past; click to enlarge); which, of course, translates to a low multiplier effect. And up to this point, I agree with him. 

But Summers' main issue is that all that extra aid will cause inflation. The favorite bogeyman of macroeconomists, even the best ones it seems. Summers is concerned that once inflation gets going it's going to be hard for the Fed control it without sending the economy into a recession...and so on.

Krugman is not having the inflation argument. He believes inflation is no more a danger today than it was a decade ago...argues that Summers himself persuasively makes that case in his famous secular stagnation thesis; that is to say that there are large structural forces at work that will keep price pressure down for the foreseeable future. Krugman does concede that a lot of money will go to people who may just save it (even to buy GME and stuff)...but so what? Such behavior will only serve to dampen the very inflationary pressures Summers is worried about. 

Krugman's big worry is that the Biden Administration will repeat the mistake of the Obama Administration and not go big enough and risk a weak recovery. Moreover, interest rates are extremely low, so we don't really have to worry about the debt! Krugman also talks a lot about politics...but that is somewhat beside the point when you are debating the merits of an economic policy...even if in reality politics drives policy. 

Ironically, Summers is the one with more real-world policy experience as a former Treasury Secretary. And I think he's right that it may be difficult to pass a $2T bill and come back for another trillion dollars of infrastructure spending. (Sure, if Republicans controlled all three branches of government they could easily do it...they are always united and on message on the big things...but Democrats are less disciplined and crave bi-partisanship, particularly Biden.)

Anyways enjoy this fascinating discussion:

Bitcoin Mania

The below chart puts into perspective the march of Bitcoin (the future of currency or this generation's pets.com?) (h/t el-erian)

Nuriel Roubini Has Some Thoughts on Bitcoin

Economist Nuriel Roubini has been a fierce critic of digital currencies like Shitcoin Bitcoin. And he's not backing down even as Bitcoin passes $50,000. He certainly makes some persuasive points as to why we are in a speculative bubble:

1. Bitcoin's not a unit of payment or unit of account

2.  It's not an asset-- no cash flow, no yield, no use, hence no fundamental value (note gold similarly has no yield, but is used in jewelery as well as medical and industrial processes; so has intrinsic value)

3. It has a negative cost to society because of the electricity necessary to "mine" it. It contributes to climate change through higher demand for fossil fuels...it is anti-ESG! In another words, it's worth less than zero.

4. And once goverments start issuing their own digital coins...all these private shitcoins will be done.

5. No reasonable corporate CFO will put their balance sheet at risk with such a volatile security. 

(Oh, and Elon Musk sucks...not necessarily an argument for or against Bitcoin, just a statement of fact).

Michael Burry Has Some Thoughts Re: Tesla and Robinhood

Michael Burry, who made $800 million shorting the housing bubble in 2008 (famously documented in the book and film, "The Big Short"), recently made perhaps up to $270 million going long GameStop. I don't know much about Burry's long-term track record but he seems to be an astute contrarian investor with a knack for being in culturally important financial events.

So, it's interesting that he's shorting Tesla...and warning about the #gamification of investing due to apps like Robinhood. Burry believes:

• Tesla shares could fall 90% without crashing the financial system--for perspective, that means Tesla's share price would go back to what it was...a year ago. Yup, that's how crazy the rally has been.
• That such a drop would be good for the market because it would temper the speculative behavior of retail investors, who are being had by Wall Street via investing apps (click to enlarge):

It'll be interesting...Tesla is a cult as much as a car company. In the past, we've marveled at how despite producing only a tiny fraction of the cars as other major automakers its market cap is larger than most of them combined. And many a hedge fund manager has been burned shorting Tesla...So, Burry may get a get a pair of comfy satin shorts for his efforts.  We shall see...

Trump Acquitted (Again)...Will Be President in 2024?

Two impeachments, two acquitals. Yesterday, the Senate voted 57-43 to convict Trump, but fell short of the 67 votes necessary to bar Trump from ever holding public office again. An embolden, albeit Twitter-less, Trump declared he'll be back and that this is just the beginning...

Yup, even though Trump was on TV inciting a mob to attack the Capitol. And said mob rampaged Congress seeking to capture Senators, Representatives and even his own Vice President. And 5 people died. Still, it was not enough for most Republicans to convict Trump in the very place the attack took place.

That is fear...fear of getting primaried and/ or losing the MAGA support when hopeful Republicans run for the Presidency in 2024. Fear so bad, that they would overlook an actual insurrection...Sure, some Republicans and Trump's lawyers tried to provide cover and make the claim that Trump was really horrified by what happended. Except that when a desperate Kevin McCarthy pleaded with Trump on Jan 6th to call off the mob, he was reportedly told..."Well, Kevin, I guess these people are more upset about the election than you are." McCarthy, in shock and in mortal danger, managed to (allegedly) blurt out "Who the f**k do you think you're talking to?" Of course, a few weeks later a physically safer and chastened McCarthy went to Mar-a-Lago to pledge fealty once more to the (future?) President.

So the joke's on Cruz, Hawley and others who had sights on 2024 against Kamala Harris. Trump's gonna be back and in a Tump vs Harris match-up, Trump probably wins. No wonder, Mitch McConnnell was pleading to the states to bail out the Republican party.

Using Big Data to Make Policy Decisions

Congress and the Biden Administration are trying to figure out who should get a new round of stimulus. Many Republicans, and some Democracts, have expressed reservations about sending checks to everyone and want to target more of those in need. Very good idea. Except how to go about doing it?

Three economists, Raj Chetty, John Friedman and Michael Stepner, have a suggestion: use big data. Using data from financial service companies, they were able to track the spending behvior of high and low income households following the reciept of their January 2021 stimulus checks. 

What the economists found was that spending activity diverged dramatically before and after the stimulus by economic strata. The chart below illustrates the effect (click to enlarge): 

The authors calcuate that in the first month after the initial $600 stimulus checks were received, households with annual income above $78,000 spent only $45 of the $600; while housesholds making less than $78,000 spent $235 of the $600. 

Why? Because, as Chetty, etal show, most high-income workers got their jobs back fairly quickly after the economic shutdown when corporations shifted work online. And they mainly used the government aid to pad their savings. By contrast unemployment for low-wage workers continues to persist and resulted in lower spending prior to getting the stimulus checks,

Chetty, etal estimate that high-income households will spend only $105 of the additional $1,400 of government aid they receive. That means $200 billion of additional government expediture will lead to only $15 billion of additional spending. Not much of a money multiplier. Targeting additional aid to only low-income households, who need it, will be far more effective. Hope government considers Chetty, Friedman and Stepner's analysis.

Stock Market Bubble? Yes!! No!! Who Knows?!

January saw a wild ride in stocks, particularly junk stocks. Widescale vaccine rollouts, permanently dovish monetary policy, massive stimulus with direct cash payments and the possibility of more government aid to come...are pushing equities to record highs. But how much higher can markets go?

Some say we are in a massive bubble and face a reckoning...not if, but when. Others are more bullish, rationalizing reasons why markets fundamentally will go up (a slight tangent here, but most sell-side research are typically self-servingly bullish---at a brokerage house you're never penalized for being bullish and wrong, just for being bearish and wrong. You can't really blame them...."research" is really just marketing...part of ibanks' expenses to get trading commissions; and over two-thirds of the time, the market goes up...so it's a numbers game).

Which brings us to Warren Buffett's "favorite" valuation metric: the market cap/ GDP ratio. A good description is available at the Current Market Valuation blog. The intuition is that stock market growth reflects underlying economic growth. Over the long term it should be roughly 1:1. So, below 100%  stocks are undervalued; above 100% they are overvalued. Currently the ratio stands at 288% ($48.7 T/ $21.7 T) or nearly 3 standard deviations from the historical average...something you'd expect to see once every 300 years. The U.S. is only 244 years old (and GDP data has only been collected for ~100 of those)...so hmm, something to think about. 

Mind you, it's NOT a market timing tool; as they say, "the market can stay irrational longer than you can stay solvent." Another big deficiency of this indicator is that it does not take into account the level of interest rates. Rates influence borrowing and profit margins of companies (and thus their valuations) as well as the the attractiveness of bonds relative to stocks---two competing investable asset classes.

The chart below shows GDP and stock market growth trends. Taken by themselves...clearly the market seems to be running ahead of itself, by a lot.

Now, compare the ratio with interest rate trends (click to enlarge chart below)...historically, when rates are low, the Buffet Indicator is high and vice versa. So as long the Fed keeps liquidity flowing, stocks will run hot. That's the tsunami that overwhelms everything else. And we've written about the empirical evidence of the Fed put. While proping up the stock market is not a part of the Fed's mandate...the Fed pays very close attention to it...believing a drop in stock value creates a negative "wealth effect" that feeds into a cycle of negative consumer sentiment and lower economic demand. And market participants know it and hold the Fed hostage to it.

But if there is one thing that does scare the market it's the spectare of uncontrolled inflation forcing the Fed's hand. Price stability is a Fed mandate. And if the Fed has to choose between controlling inflation and propping the stock maket, its going to choose the former... But inflation is not really a problem for the Fed right now...on the contrary deflation is probably the bigger worry. In fact, a little inflation is good for "greasing the wheels" of commerce. And depsite providing oceans of liquidity over the past decade, the Fed has not been successful at bringing inflation up to the 2% per year that's considered "good." 

If inflation expectations remain low then investors are being rational in choosing stocks over bonds. Currently the benchmark 10-year Treasury bond is yielding 1.2%. The widely followed Shiller CAPE ratio for stocks currently stands at 35.8; in another words, stocks are yielding 2.8% (1/ 35.8) or 2.3x bonds. Sure stocks are riskier, but at such low rates bonds are risky too. So the "equity premium" or spread over bond yields is compressed and investors favor stocks. 

Why has inflation stayed so low despite record low unemployment (at least pre-Covid), massive tax cuts and very accomodate monetary policies? No one really knows...

The net effect is all this probably ends very badly at some point...but only when inflation rears its head. Until then, companies will contine to binge on debt and investors will likely continue to reward them with higher valuations and keep the cycle going...so keep buying Growth and Momemtum stocks and Bitcoin.

Hedge Funds Have Decent January, Despite GME

GameStop was one of the most shorted hedge funds names coming into January. And last month's epic short squeeze that we wrote about (here, here and here) cost a number of big-name funds, like Melvin Capital, D1 and Point72, bigly--as they say. 

The S&P 500 was flying high up to the week of the squeeze. The equity benchmark was up 2.6% through Jan 25, before closing the month down 1.1%. So, we figured the pain would be felt broadly across hedge fund land...but, so far, Jan HFRI hedge fund returns suggests the damage was limited to a select group of funds with the HFRI Fund Weighted Composite Index, the widely cited hedge fund benchmark, up 0.78%. 

So, most hedge funds did well last month, at least the ones reporting early! Perhaps because it wasn't just WSB driving up the GME price, other hedge funds were in it too, amplifying the rally. (And, of course, Robinhood's liquidity issues shut out retail investors for a time which helped hedge funds.) True, the HFRI Equity Market Neutral Index was down 0.53%, but given this leveraged strategy is one of the most vulnerable to short squeezes, we're surprised (shocked even!) that losses were so...umm, pedestrian. Well, in any case, good for you hedge funds! You came out of a difficult month in good shape. 

Venn has a good recap of the factors that drove equity returns and, of course, Crowding was the biggest driver (click to enlarger).

As shown, the Equity factor was down 0.17% on the month. It was actually up 3.5% through Jan 25 on good vaccine news, but gave all of that back and more in the last week. And there was a LOT that went on within the Equity factor. First, Crowding had its worst month on record--of course! Hedge funds often herd into the same names on both the long and short sides...because differentiated strategies are,  well, rare...and there was broad degrossing in the last week of January. 

In a short squeeze, some things have to go up...and the Small Cap factor had one it best months ever (94th percentile) gaining 3.4%. Small Cap and lower quality/ higher risk stocks are often the most shorted, so makes total sense. Conversely, Low Risk stocks on the long side would have been sold in a short squeeze (because you know, (i) margin calls, and (ii) "hedge" funds...need to be hedged) and that factor had a big down month (11th percentile).

Separately, Macro factors related to inflation-expectations, also had a great month. The Inflation factor rose 2.1% (90th percentile) and the related Commodities factor gained 1.8% (84th percentile) on rising energy and agriculture prices. Interestingly, Macro hedge funds had a mundane Jan, the HFRI Macro Index was up 0.23%--either funds were split on inflation expectations or just hadn't put on a lot of risk for some reason. 

All in all, a good start to 2021 for most hedge funds.  

Tom Brady's SB Wins in Perspective

So, Tom Brady got his seventh SB, yes 7, siete, sete, sept, saba, sheva...(at 43, if that matters). Just how remarkable that is: it's more than any NFL franchise!

How does that accomplishment feel...probably dizzying, delirious? Let's just ask Tom:

Hedge Fund Payday

Sure January was tough...very, very tough, for Gabe Plotkin and a few other hedge fund managers, but they'll always have 2020. The top 15 managers collectively made $23 billion, in one case even as their open funds lost billions...Yes, we're taking about you Jim "$2.6B" Simons. Renaissance's RIDA and REIF were down 20%-30% but, of course, naturally, the employees-only Medallion was up 76%--does Medallion just trade with other two? Anyways:

So, Gabe nearly lost his firm shorting GME in January, but he took home nearly ~$900M in Dec, enough to buy a new house.

Super Bowl Sunday is Here...and it's Brady Time Again!

It's Super Bowl time and, of course, Tom Brady is in it! His 10th SB appearance is, by far, the most of any player...the closest is six by former teamate and Pats kicker Stephen Gostkowski. Among quarterbacks John Elway is the closest with five SB appearance. And of course (and more importantly) he's also won the SB more times than any player...six and counting.

Tom Brady is 43 and in his 20th year in the NFL, to get a sense of how long that is and how much has otherwise changed, here's how Tom looked in a video game in 2001 and 2020:

2001 Brady

2020 Brady

SB Nation has good story on why Brady left the Patriots...many little things, but mainly because he wanted a long-term contract and the Patriots refused to give him one. And that rejection looks to have been motivation for a resurgent Brady:

2019 with the Patriots: 4,0377 yards passing, 6.6 yards per attempt, 24 TDs, 8 Is, 88 QB rating

2020 with the Bucs: 4,633 yards passing, 7.6 ypa, 40 TDs, 12 Is, 102 QB rating

So defintely, in the Brady vs Belichick war, Tom is ahead Bigly.

Speaking of which, Brady has his fair share of detractors...basically everyone he is not winning football games for. But he does have a big fan in Donald Trump and Brady certainly appreciates the support, which led to his most recent roasting on SNL.

Good luck, Tom!

Amazon Announces New Boss

Amazon had a blowout quarter, with EPS higher by 118% over last year. But all that was overshadowed by the (somewhat) surprising announcement that Jeff Besoz was stepping down as CEO (he will remain Chairman) and handing over the reigns to AWS boss, Andy Jassy. Besoz will spend more of his time focusing on his space company Blue Origin (and beating Musk's Space X in every way).

AWS is Amazon's cash cow, responsible for 40% of its profits. And Jassy pioneered that business, begining in 2003. He's been with Amazon since 1997, almost as long as the company itself. You can check out his bio here.

Here's Jassy's memo to Amazon employees:

Hey Team. I'm assuming most of you saw the news from Jeffb today that he'll be transitioning to Executive Chairman in Q3, and that I will move into the role of CEO of Amazon at that time.

I'm excited for Jeff and look forward to watching his next chapter unfold. Seems a pretty good bet that it'll be something special. It's hard to overstate how much I've learned from Jeff over the past 24 years  - from how much I obsess over customers, to the importance of inventing and looking around corners, to the criticality of hiring and developing great people, to the value of high standards and consistently speedy, outstanding delivery. I am grateful for the opportunity to lead Amazon, and excited about what the future holds for the Company.

I'm also excited about what the future holds for AWS. Like the rest of Amazon, AWS is in a very good spot. At a $51B revenue run rate, growing 28% YoY [year on year], and with the meat of enterprise and public sector adoption starting to happen now, we have a chance to build a very unusual, long-term business. And more importantly, we continue to help millions of new and existing customers not only transform their own companies, but also entire industries. One of the amazing things about AWS and Amazon is that we're still such a small overall share of the market segments in which we address. It's still very early days.

Nothing is changing in the short term as it relates to AWS. You'll be stuck with me until Q3; and even after that I will always be passionate and connected to AWS. We have plenty of time to determine in the coming weeks who will lead the AWS business when I assume the new role. We will share those details in the future. We have unusual leadership depth in AWS that, along with all of you, are the heart of the business - and that doesn't change. In the meantime, stay giddied up - we have so many customers needing our help to transform and accomplish what they're trying to do. We won't be bored any time soon :-).

Andy

Did GameStop Just Change the "Hedge" Fund Business Model?

Like the rest of America, we've been riveted by the GameStop standoff between Redditors and hedge funds. While new short interest data suggests we may be at beginning of the end of this saga, there could be lasting damage to the hedge fund business model itself. Nir Kaissar at Bloomberg ponders the options for equity long/ short funds who may fear being targeted in the future by the Redditor crowd:

"...that leaves long/ short hedge funds with some unappealing options. If they abandon their shorts, then they lose their hedge. Who want to pay sky-high hedge fund fees-- traditionally a 2% management fee and 20% of profits-- for a long-only stock portfolio that can be had for a fraction of the cost through a mutual or exchnge-traded fund? And if try to protect their shorts using options and other derivatives, the cost will drag down returns, possibly as much as 3% to 5% per year. After more than a decade of dissapointing performance, they can ill afford to squander precious percentage points."

To be clear, hedge fund fees have been shrinking for a while now as promised returns never materialized and very few hedge funds ever consistently generated positive returns from their short book. Investors had long started to question the merits of such higher fees for an activity that never generates alpha, but now they will have to contend with the business risks (and not just investment risks) of doing so.

And regulators are loathe to be seen helping hedge funds. In any case, from what we know, there does not seem to be much they can do. The Redditors have not broken any rules and any actions taken to "help stablize markets, blah, blah, blah" will only add to the widespread perception that the game is rigged in Wall Street's favor...just look at the anger Robinhood's restriction on GME trading stoked. So hedge funds are in a bind...many will need to adopt or wither.

PS: This sober post from Naked Capitalism takes the opposite view that Redditors' actions will change hedge fund and market behavior for the worse...hurting everyone.

GameStock Shorts Collapse...End of the Run?

This morning, we wonder about the data that showed GME's short interest declining a paltry 8%, even after last week's massive (historic?) short squeeze. Were HFs stubbornly doubling down on their shorts and continuing this saga? It seemed so...but this afternoon data firm S3 Partners came out with new estimates that suggests GME short interest fell by 35M shares  (-22%) since last week. Borrowing fees have also come down substantially, easing the pressure on HFs. So we've gone from SI at 121% of float 10 days ago to a reasonable 53%...if fact, GME is not even the most shorted stock in the R2000 anymore. Not surprisingly, GME fell over 30% today.

So is the rally over? With SI and borrowing fees falling, what could be the catalyst for another short squeeze that propells the stock up? It was a great run...time to take profits and move on? Some of the Reddit crowd may already be doing so into...silver.

WSB vs HFs: The Fight Continues...Still Big GME Upside Left?

Melvin Capital is on life support. Hedge funds have lost $20 billion YTD and are de-grossing at the fastest rate since 2009 following last week's epic GameStop short squeeze. But was it that epic? Because short interest in GME apparently has only dipped 8%! What?? Every time GME shoots up, is some other hedge fund coming in and putting on a new short position in place of the fund that just got taken out? Is this still about Redditors vs HFs or just a battle royale at this point, everyone going nuts in the most exhilirating game in town? 

Who know? What we do know is that there are whole of LOT of GME shorts that still need to be covered, a lot of HFs who can put on new ones on, a lot of liquidity in the system and a lot of people stuck at home in front of their screens ready to buy...and that means GME has a lots, lots of runway to move up, Bigly. Oh, and the Biden checks are coming soon.

Also...Robinhood is in desperate need of capital. And then there are the political and regulatory angles. If a financial story is covered by SNL, its massive. And this one has so many sides. The drama has likely just begun...