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I don’t know about you, but I’m ready to say farewell to this whole Reddit/GameStop
But before we bid adieu to this weird market moment, we need to take just one more run around the horn, because it’s left three big benefits in its wake that no one is talking about right now.
These three hidden catalysts all point to stronger market gains in the weeks and months ahead—gains we can “convert” to 7%+ dividends when we pick up one of my favorite investments, stock-focused closed-end funds (CEFs), right now. Let’s dive in.
Reddit Gamblers’ Wins Will Go Into the Economy (and Boost Other Stocks)
The most immediate positive for the market comes from the big gains early investors in GameStop and other companies at the center of this battle enjoyed. We know that about $70 billion flowed from pummeled short sellers to retail investors throughout this affair, and that’s not including “longs” who held these stocks prior to the whole kerfuffle and sold as they took off.
Because these gains are in the hands of individuals and not big institutional players, we can expect a lot of this cash to be spent on a variety of things in the economy—sales that will be captured by publicly traded companies.
That, in turn, is good for stock-focused CEFs. A couple for your watch list include the Liberty All-Star Equity Fund (USA), with an outsized 10.6% dividend and a 3.4% discount to NAV (another way of saying the fund trades for 3.4% less than its portfolio value). USA’s top-10 holdings include consumer-focused names like Amazon.com (AMZN), PayPal
It’s a similar story with the Gabelli Dividend & Income Trust (GDV), with a 5.9% yield, 13% discount and a similar bent toward the consumer economy, with holdings in companies such as Mastercard
GameStop Situation Attracts More Investors—and Boosts the “Wealth Effect”
To be sure, GameStop gamblers’ wins, taken together, are small compared to the $20-trillion US economy, but they’re still critical when you consider the effect this episode has had on investing in general.
There’s now a real sense that retail investors can win against the big players. The GameStop affair has also spurred an interest in investing more generally, especially among millennials. That will drive more people to put money in the market, helping lift share prices.
And then there’s the overall “wealth effect” from a booming stock market.
Stock Gains = Spending Gains
National Bureau of Economic Research
Research shows that for every dollar of stock-market gains, consumer spending rises 2.8 cents per year, as the rising market makes investors feel richer. That’s in a “normal” market, but remember that GameStop is the story of the average investor beating the big guys, so the effect on spending could be higher, as average Americans feel they have a better chance at getting a share of that stock-market growth than they used to.
Short Selling: Destined for the History Books?
The third reason this affair is good for stocks is that short selling stocks has changed forever.
In the past, hedge funds used complex analytical tools to determine if a stock was overvalued. One factor in determining this was retail-investor sentiment. If a stock got overhyped by overeager amateurs, it was a ripe short target. Furthermore, if a stock was the opposite—a company left for dead in a dying sector, like Sears, JCPenney
Obviously, those assumptions no longer work. As a result, hedge funds will not be shorting stocks as much as they used to. Some will give up entirely. We’ve already seen Citron Research announce that it will no longer publish reports on stocks to short, focusing instead on bullish ideas for going long. This is big news, as Citron has gained a reputation for being one of the world’s leading short sellers. If they’ve given up, inferior short sellers will, too.
Less shorting of stocks means more money will flow into simply buying stocks, helping prices rise.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Safe 8.3% Dividends.”
Disclosure: none
