The Capital Note

The Capital Note: Wall Street Bets & Work from Home

A Wall Street sign hangs outside the New York Stock Exchange in Manhattan, N.Y. (Andrew Kelly/Reuters)

Welcome to the Capital Note, a newsletter about finance and economics. On the menu today: Wall Street Bets and Work from Home.

Wall Street Bets
“Alternative data” — those not traditionally deployed in economic and market research — have come to play a central role on Wall Street in recent years, with asset managers sifting through credit-card-spending trends and satellite imagery in an attempt to gain unique investment insights.

Total spending on alternative datasets has ballooned from roughly $230 million in 2016 to more than $1.7 billion this year, a trend accelerated by pandemic uncertainty. Everything from TSA traveler traffic to Google Maps usage is used to track consumer activity.

Stock pickers typically use this information to decide which companies are well-positioned to perform well. Now, they’re cutting out the middleman and taking their stock picks directly from consumers.

While alternative data has been a buzzword for years, demand has exploded in 2020. First it was Covid-19 infection charts and travel and dining trends. Now it’s intel on what retail investors are doing with their cash. As their heft in markets has grown, individuals have morphed into a force Wall Street can’t afford to ignore.

“When you see episodes in the market, heavy bouts of buying or selling, it’s important to know where they’re coming from and why,” said Quincy Krosby, chief market strategist at Prudential Financial Inc., who admits she checks sites like Twitter.com often to gauge retail trends. “Ultimately, retail investors have an effect on the market.”

It has long been a practice among day traders to “piggy back” on the stock picks of professionals, but in this brave new world the smart money is following the dumb money. With day traders accounting for one-fifth of all volume in stock markets, it’s not an unreasonable strategy. In fact, a Goldman Sachs index tracking stocks popular among Reddit users has outperformed not only major indexes but also hedge funds so far this year.

One wonders, though, who’s actually performing financial analyses of businesses.

— D.T.

Work from Home
The idea that the way we behave as people will be changed permanently by COVID-19 has never been particularly credible to me (which is not to discount the political and economic damage being caused by the pandemic and the efforts to contain it), although it does seem clear that the coronavirus has accelerated various changes — particularly in the area of automation — that were already under way.

Here’s yet more research on that topic, this time from Lei Ding and Julieth Saenz Molina of the Philadelphia Fed:

The results suggest that the pandemic displaced more workers in automatable occupations, putting them at a greater risk of being permanently automated. The automatable jobs that are more vulnerable to the pandemic include jobs that do not permit remote work, have a high risk of COVID-19 transmission, or are in the most affected sectors. While most of the job losses during the pandemic are expected to be temporary, a replication of the analysis for the Great Recession suggests the losses of automatable jobs could become permanent during the recovery.

Nothing particularly startling there, but the key word is “permanent.”

So far as the broader question is concerned, mankind has had to deal with serious infectious disease from the beginning, and, yet, here we are, living in cities and, yes, working from offices.

Having worked in offices for decades — and having seen how they work — I think that the speculation since March about the death of the office is wildly exaggerated.

It was, therefore, interesting to read this report in Bloomberg:

A troubling pattern emerged as most of JPMorgan Chase & Co.’s employees worked from home to stem the spread of Covid-19: productivity slipped.

Work output was particularly affected on Mondays and Fridays, according to findings discussed by Chief Executive Officer Jamie Dimon in a private meeting with Keefe, Bruyette & Woods analysts.

Mondays and Fridays, eh?  To quote Casablanca’s Captain Renault I am shocked, shocked by this revelation.

Worse was to follow:

“The WFH lifestyle seems to have impacted younger employees, and overall productivity and ‘creative combustion’ has taken a hit,” KBW’s Brian Kleinhanzl wrote in a Sept. 13 note to clients, citing an earlier meeting with Dimon.

The bank has noticed the productivity decline among “employees in general, not just younger employees,” JPMorgan spokesman Michael Fusco clarified in an emailed statement, adding that younger workers “could be disadvantaged by missed learning opportunities” by not being in offices.

“Missed learning opportunities.”

More interesting, if unsurprising is the reference to “creative combustion.” The Bloomberg reporter also refers to “worries that remote work is no substitute for organic interaction.”

Creative combustion, organic interaction…Shakespeare screams.

These shortcomings come as no surprise. The value of working with colleagues (in person, rather than via a machine) is hard to quantify, but it ranges from the creation of team spirit both during and after work, a more collaborative (often informally so) approach to problem solving, a higher speed of decision-making and, yes, “creative combustion.”  “Organic interaction” matters.

Bloomberg:

While pre-pandemic studies found remote workers were just as efficient as those in offices, there were questions about how employees would perform under compulsory lockdowns.

The pre-pandemic remote workers were probably doing so, for the most part, because either they or their jobs were particularly well suited for remote work. I am unconvinced how widespread a phenomenon that really is.

That said, we could see a future where much more employment is transformed into, essentially, piecework from home, but that’s a dystopia for another day.

— A.S.

Around the Web
The consequences of lockdowns (1):

As Covid-19 began to sweep across the planet earlier this year, the warnings about the disease’s impact on Africa were terrifying. The World Health Organisation predicted ten million cases within six months, raising the horrifying prospect of fragile health systems becoming overwhelmed with corpses piled up in hospital corridors. Other UN experts said there could be 1.2bn cases and 3.3m deaths without emergency interventions, while more optimistic modelling from the influential experts at Imperial College, London, anticipated 300,000 deaths.

Little wonder countries on the continent rushed to follow the lead of rich nations such as Italy and Spain that were visibly struggling to cope with pandemic. Many closed borders, shut businesses and locked down citizens. Among the firmest responses was Uganda’s, where public transport was suspended, schools shut down, shops closed, curfews imposed and big gatherings banned. Kampala has conducted more than 350,000 tests, according to official data. After doom-laden warnings of 68,000 fatalities from the virus if there were failure to act, there have been 44 confirmed coronavirus deaths in this east African nation of 43m.

Such actions won praise from global health bodies. Yet were blunt lockdowns really the right approach in Africa? A growing body of doctors, economists and scientists fear these measures will have disastrous consequences. These experts warn of financial carnage, spiralling epidemics of other diseases, the intensification of gender and wealth inequalities and the battle against poverty being set back by decades…

The consequences of lockdowns (2):

Government shutdowns have created a solvency problem with severe long-term ramifications in large parts of the business fabric. One in five companies in the U.K. is considered “zombies”, almost 12% in the United States and more than 15% in the eurozone. The Bank Of Spain warns that 25% of Spanish companies are in a situation of technical bankruptcy and business closure.

Governments have ignored the fragility of the private sector for years, while corporate debt and solvency ratios reached new record-highs. However, what is more important is that governments have not paid any attention to the weakness of the small business fabric, millions of companies with one or two employees that managed to survive day by day, that had no debt or assets and have been destroyed by the misguided and ineffective forced shutdown, not because their owners conducted wrong strategies…

Germany’s China Trap:

In the fall of 1984, Helmut Kohl traveled to China with German industry in tow on a mission to harness what he predicted would be a “century-long modernization” effort.

After overseeing the groundbreaking of Volkswagen’s first Chinese factory in Shanghai, Kohl returned home, telling parliament that he and Chinese leaders had resolved to build a “stable, long-term partnership.”

Kohl’s prophecy came true, convincing a generation of German political and business elites that China held the key to Germany’s long-term prosperity.

What they forgot to consider is what to do if Beijing used that key to lock them into an economic relationship they couldn’t escape from.

As Europe weighs what course to take in the face of Beijing’s growing belligerence at home and abroad, it has become increasingly clear that the decision depends on Berlin, far and away China’s most important counterpart in the region. Equally clear is that Germany’s economic entanglement with China has become so extensive that reversing it is no longer a realistic option…

Random Walk
There can be occasions when a stock price soars, seemingly beyond reason, and yet short sellers are not to be seen. Sometimes the reasons for this are prudential: Betting against a bubble can, after all, be very expensive. As Keynes probably didn’t say, “the market can remain irrational longer than you can remain solvent.”

But sometimes the reason is technical: The stock is too difficult and/or expensive to short, normally because it is difficult to borrow: A short seller needs to borrow the stock that he or she is going to sell short. Some years ago, when I was still working in finance, one of our analysts identified a stock that he thought was wildly overvalued. His case was clear, thoroughly researched, and convinced some institutional clients. But the stock was widely held by retail investors and thus difficult to borrow. Potential short sellers were disappointed that they couldn’t take advantage of this “opportunity” — and then they were very relieved. The stock continued to soar for another year or so. Eventually it did crash, but no short seller would have been able to take the pain that waiting to be proved right involved.

Reading a piece today about Nikola in Axios Markets today reminded me of that story. I have no view on Nikola, but it’s not hard to see why this struck a chord:

Background: Nikola went public earlier this year through a reverse merger with a blank-check company and has recorded no meaningful revenue, yet reached a market valuation higher than Ford and sold an 11% stake to GM for $2 billion.

What’s happening: Short sellers are effectively locked out of Nikola’s shares going forward, says Ihor Dusaniwsky, managing director of Predictive Analytics at S3 Partners, which tracks short sales, or bearish bets that a stock’s price will fall.

What he’s saying: “Short selling cannot be a driver of price movement in the near future due to a severe lack of stock loan availability,” Dusaniwsky said in a note to clients.

  • “Because non-insider NKLA holders are predominantly retail based who are not active lenders of stock nor in margin accounts and there are not many institutional or hedge fund holders who actively lend stock, or whose stock is [rehypothecated] and lent out, the overall lendable supply of NKLA stock is very small.”
  • Just 1.3 million of the 106 million shares traded on Monday had short exposure, and it’s likely the ratio will stay that way for some time.

What it means: The lack of short sellers and the high percentage of shares owned by retail traders could push Nikola’s price higher, even in the face of an SEC investigation, as the retail market has shown little worry about fundamentals…

Watch this space: Those betting against Nikola “are walking a tightrope,” Dusaniwsky says, as fees to borrow the stock for shorting have risen to 25%, or nearly 100 times the average fee for other auto companies popular among short sellers….

— A.S.

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