Amazon

FAANG stocks were up an average of +27.3% in 2021 but Amazon.com Inc (AMZN) underperformed the group significantly with only a +2.4% return. Shorting FAANG stocks was an unprofitable strategy in 2021, contributing $14.6 billion of mark-to-market losses to short seller’s bottom lines. Surprisingly, only AMZN is seeing outsized recent short covering in the group, with almost $4 billion of buy-to-covers over the last thirty days, a -26.5% decrease in shares shorted. Much like Punxsutawney Phil not seeing his shadow and predicting an early spring, AMZN short covering may be a harbinger of a much greener price performance in 2022.

After a Judicial Committee Anti-Trust Panel hearing where mega-tech CEO’s Jeff Bezos of Amazon.com Inc (AMZN), Tim Cook of Apple Inc (AAPL), Sundar Pichai of Alphabet Inc (GOOG, GOOGL) and Mark Zuckerberg of Facebook Inc (FB) were grilled for several hours on a myriad of topics from anti-competitive practices to protection of personal information they will now face investor scrutiny of their 2^nd quarter earnings. These are some of the most shorted stocks in the U.S. market and used as an overall portfolio Beta hedge and straight out Alpha generator.

The FAANG stocks are five of the top ten most shorted stocks in the domestic U.S. stock market and because of the sheer size of combined short exposure they represent both risk “Alpha” trades and hedging “Beta” trades.

The weeklong rally from last week’s lows has taken a bite out of the $93.7 billion of mark-to-market profits, +11.12%, short sellers have earned since the beginning of October. Over the last week the S&P 500 index increased by 3.31%, the Nasdaq by 4.3% and the Russell 3000 by 3.23%. The S3 Blacklight platform tracks over 8,000 U.S. domestic equity shorts worth over $825 billion, which incurred mark-to-market losses of $23.3 billion, or -2.86%, over the last week.

Like Black Friday shoppers, investors are discounting prior performance and looking forward to the holiday shopping season to decide which retailors to put on their naughty or nice lists. Most of the larger retailers posted impressive previous quarter sales but investors are looking closely for signs for potential holiday misses. Retailers such as Target Corp (TGT), Kohl’s Corp (KSS) and TJX Cos (TJX) are looking at profit margin rates and profit guidance’s that may not meet expectations as they ramp up e-commerce, shipping and remodel stores to lure in buyers. Several retailers are having revenue and operational difficulties with L Brands (LB) cutting its dividend, Lowes (LOW) closing down two home improvement subsidiaries and its Mexican retail operation and Sears (SHLDQ) filing for bankruptcy.

FAANG stocks (FB, AMZN, AAPL, NFLX & GOOGL) were down 4.7% last week, 3.6% on Friday alone, after Amazon.com and Alphabet announced disappointing quarterly results amid overall weakness in the tech sector. While long shareholders incurred large losses from these widely held stocks, short sellers made $1.62 billion in mark-to-market profits last week.

Amazon short interest is at $8.57 billion, with 5.21 million shares short, for 1.28% of the available float. 3rd Quarter earnings per share beat estimates but revenues missed. The stock was up 7% during the day but is now down 5% after hours. Shorts were down $615 million in mark-to-market losses at the market close but are now recouping $459 million of those losses in the aftermarket. Shorts were building their positions ahead of Amazon.com’s earnings release with 360 thousand new shares shorted over the last week. We may see continued short selling in the morning if shorts expect this aftermarket price weakness to continue as analysts dive deeper into Amazon.com’s results.

Tesla Inc (TSLA) and the FAANG stocks continue to be some of the largest shorts in the U.S. market, taking five of the top ten spots in the U.S. league table. While Tesla is a momentum, value and convertible arbitrage short, one of the main drivers for the large short interest in the FAANG stocks is their ability to be a “turbocharged” hedge for the long side of a portfolio.

Amazon.com’s (AMZN) pursuit of being the retailer of choice for as many product lines as possible has reached into the prescription drug industry with its purchase of online pharmacy PillPack Inc. (Private Company) for an estimated $1 billion. This follows CEO Jeff Bezos’ recent alliance with Berkshire Hathaway Inc. (BRK/AB) and JPMorgan Chase (JPM) to form a joint venture to address the complexity and high cost of worker health benefits. Stocks in the soon to be disrupted Drug Retail and Healthcare Distribution Sectors felt the pain immediately with the average stock price in the two sectors down 5.6% at the close. AMZN’s stock price is up 2.5% on the news, generating a $20 billion increase in its market cap on the impending $1 billion PillPack purchase.

State and local tax authorities will now be able to charge and collect taxes for online transactions executed by their constituents after the Supreme Court of the United States (SCOTUS) reversed a 1992 ruling which excluded online transactions if the seller did not have a physical presence in the state. This ruling now puts online retailers and brick & mortar retailers on a level taxable playing field.  The news pushed most Internet Retailers into the red, with short sellers up $184 million in mark-to-market profits on their short holdings.