The stock market got a huge boost Tuesday morning, with major market benchmarks seeing sharp moves to the upside. The gains came despite the fact that lawmakers still haven’t agreed on a final stimulus package to try to counteract the impacts of the coronavirus pandemic on the U.S. economy. As of 11 a.m. EDT, the Dow Jones Industrial Average (DJINDICES:^DJI) was up 1,384 points to 19,976. The S&P 500 (SNPINDEX:^GSPC) rose 146 points to 2,384, and the Nasdaq Composite (NASDAQINDEX:^IXIC) gained 387 points to 7,248.
COVID-19 has dramatically changed life for millions of Americans, and the trend toward staying at home has undoubtedly given Roku (NASDAQ:ROKU) a boost. However, the financial implications have put pressure on some financial companies, and Invesco Mortgage Capital (NYSE:IVR) fell prey to dysfunction in the mortgage-backed securities markets that exposed the risk of its investing strategy.
Roku cashes in on a captive audience
Shares of Roku were up 9%, adding to its gains over the past week. The streaming television specialist has a business plan that’s tailor-made for those who need to stay at home, and investors seem more optimistic that rising viewership will help Roku make more money.
Image source: Roku.
Roku has been working hard to try to boost the profit potential of its streaming platform. Recent acquisitions have positioned the company better to sell advertising space to small businesses, opening up an additional revenue stream beyond the large advertisers and ad agencies that have been easiest to do business with in the past. At the same time, Roku’s working on developing its own content channel, and as its number of subscribers rises, the TV streaming specialist will have greater latitude to make more lucrative deals in licensing content.
Roku had an amazingly strong 2019, but its stock dropped in 2020 despite the alignment of its business model to the opportunities the coronavirus crisis has created. Regardless of how long COVID-19-related lockdowns last, Roku should have a good chance to use the experience as a springboard to accelerating growth.
Invesco Mortgage misses a margin call
Meanwhile, Invesco Mortgage Capital saw its stock plunge 45% Tuesday morning. The real estate investment trust said that unusual conditions in the mortgage-backed securities market led to its having to negotiate with financing providers to avoid a potentially catastrophic situation.
Invesco Mortgage said that due to the coronavirus crisis, it had gotten far more margin calls than it would typically receive from the counterparties that provide it with financing. The REIT apparently had enough capital to cover margin calls through last Friday, but Monday’s continued stream of requests left it without sufficient funding to meet those calls. Moreover, Invesco Mortgage thinks that market disruptions are likely to lead to more margin calls in the near future.
In response, Invesco Mortgage is talking with its counterparties to see if they can forgo making future margin calls. The success of that negotiation process is uncertain, however, and so the REIT chose to delay payments of previously declared dividends to shareholders pending a final outcome.
The financial markets have seen some strange things happen lately, with illiquid conditions creating some added uncertainty. Despite Federal Reserve efforts to eliminate systemic risk, investors need to look at individual companies to see what dangers could lie ahead if these problems persist.