- The idea that houses are going to outperform stocks in the short to medium term due to the yield of cash flow from property given the risk profile, which has resulted in my spending the last several months doing numerous house inspections and dedicating a considerable amount of my waking hours to sourcing an investment property.
- Nothing much had been happening on the stock market
The key word in the second sentence is of course "had". Anyone who has been keeping up with the news of late has of course heard of the Gamestop Wallstreetbets saga and I thought had though that it would be good to wait for the day to day drama to blow over before commenting on it. With the situation calming down a bit, I am finally able to put my "pen" to "paper" and provide my opinion on the last several weeks.
Before we begin though, some context:
What is GME
Gamestop is an American game retailer with a focus on electronics and consumer electronics sold through their bricks and mortar stores. Founded back in 1984, it was one of the world's largest video game retailers, Australians would recognize their subsidiary EB Games as a regular in large shopping centres. As you would imagine, through the transition to digital rendition of games and the subsequent lockdown, GME has been gradually reducing in price through the years.
Rise, Short Squeeze and Subsequent Decline
Our story starts with a redditor by the name of Keith Gill who goes by the username r/DeepFuckingValue, reflecting his perchance for value stocks which have been underappreciated by the general public. In September 2019 (when GME was trading at around $5) he purchased a $53,000 position in GME as he believed that it was a value purchase that would eventually rise back up to fair value. Making numerous youtube and reddit posts about the subject. This eventually lead to other posters doing their research on the stock and realisng that GME was one of the most heavily shorted companies with roughly 140% of their public floated stocks being shorted. This means that some of the already borrowed shares were loaned out again to short. One of the biggest holders of these shorts was none other than Melvin Capital, one of Wall Street's best performing hedge funds.
This prompted a considerable amount of online discussion pertaining to a potential short squeeze whereby highly shorted stocks would have to be brought back at higher prices to stop the losses they had accumulated from their positions, which would of course have lead to an even higher price (for those interested, the VW squeeze of 2008 is a good reference). With this in mind, the masses of retail investors at r/WallStreetBets took up the cause and bought vast amounts of GME, pushing the price from $20 per share up to $483 fueled by a desire to make some tendies and for some, a crusade to make the hedge funds and Wall Street pay for the pain they had caused in the GFC. Of course this had captured the attention of not only stock traders in America, but the whole world. It would have been no understatement to say that the sentiment on r/Wallstreetbets was euphoric:
The fallout from this was significant, with Melvin Capital announcing losses of 53%. Shortly after, brokerages such as RobinHood and IG limiting purchases of GME stock as well as others such as BB, AMC and NOK which had also been pumped in the same manner, the response was furious with other subs such as r/stocks, r/investing and r/options banding together in their castigation of the institutions preventing retail investors from exercising their right to purchase, notably it also briefly united both the left and right aisles of the political spectrum in their condemnation.
Peak frenzy occurred on the 29th of January which happened to be a Friday. The weekend that ensued was filled with misinformation at best and corruption and conspiracy theories for those who are more cynical. R/WallStreetBets subscribers ballooned from around one million to over six million with proven infiltration by bots as well as opportunists who tried to take command of the situation and pump other penny stocks as well as SLV. Their discord server was shut down temporarily on allegations of hate speech and the SEC had announced that they would be actively monitoring the sub for allegations of market manipulation.
Since the opening on the Monday after, the stock has seen a fairly sharp decline in price despite cries by alleged shareholders to "hold the line". As it currently stands, GME trades for roughly $60 and shorts are still estimated to be at 100% of the stocks, indicating that the squeeze had yet to occur, but the stock holders on r/wallstreetbets appear to be quite despondent and the prices seem to have stabilised to a moderately slow decline.
Discussion
I've spent the last week or so reading quite a few analytical pieces to try to draw some conclusions on what happened, which I will put briefly:
- In the end, the stockmarket is just that, a market. It is a place for individuals to buy and sell stocks for profit, nothing more, nothing less. Those who wish to use the market to be a weapon of sorts to launch a crusade against the hedge funds for their behaviour during the GFC should reconsider their motives. Even if Melvin went into liquidation, there are still hundreds, if not thousands of hedge funds that are willing and able to take up the void that Melvin created. Rather than trying to take down hedge funds by way of pumping stocks that have been shorted, retail investors should consider that it was the government who made the decision to bail out the hedge funds and the government who offered such a lack of regulation on the industry which caused the fiasco to begin with.
- When the romanticism of taking down the institution is stripped away, this case study is one of a textbook pump and dump on the part of redditors. From the outset, u/DeepFuckingValue has been a self proclaimed value investor who saw the arbitrage between the value of GME and the price in which it was trading for. He had purchased this through both fundamental and technical analysis. Those of whom purchased GME at $300 after it had made headlines around the world were obviously too late. There was no justification at all to be buying the stock for a price which outpaced fundamentals completely, and as we will have seen, those shareholders are the ones who were left with considerable losses. In the end, it is never wise to join in herd mentality and buy what everyone is buying unless you have a firm conviction of why it will go up as well as an exit strategy.
- This case study has proven that social media is an influence in the markets which had, until now, not been factored into traditional risk analysis. Suffice to say, this will definitely have to be captured into any such calculations.
For those wondering, I didn't purchase any GME, nor do I intend to dabble in the US market whilst prices are as they currently stand, but it was an extremely exciting rollercoaster to watch, even on the sidelines.
by 小福
