- Stereotype
- Apr 24, 2010
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College Slice
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i thought this was the best article about it today https://www.bloomberg.com/opinion/articles/2021-01-28/knowing-when-to-sell-gamestop-stock-at-the-top-is-impossible
I really recommend reading it (copy and pasted because they can have an annoying paywall)
quote:
EndGameStop
What is the endgame for the GameStop Corp. trade? You could imagine a story like “the stock keeps going up to $1,000 as people realize this is really a $70 billion company with enormous ability to grow earnings and expand margins, and then it stays there as GameStop executes on its new plan and becomes the dominant player in the video game industry.” That is the sensible endgame, the normal one, the sort of endgame that, for instance, Tesla Inc. bulls imagine for Tesla. The stock rockets up because the market comes to understand and believe the company’s long-term vision; investors look past today’s relatively modest results and value the company based on what it will do in the future. Then the future arrives, the company does what people expected, and the valuation is justified.
This is quite hard to imagine, and I don’t think many GameStop bulls expect it to go this way, but I guess it’s on the menu.
A second possible endgame is like “the stock keeps going up to $1,000, every hedge fund is bankrupted, the stock market is shut forever and capitalism ends, ushering in a new golden age of kindness and abundance.” This again does not strike me as especially likely—though more likely than the first one—but let’s also put it on the menu.
Every other endgame has the basic contour of “the stock keeps going up to $1,000 (or whatever), then it crashes back down again.” That’s how bubbles work, and speculative manias, and pump-and-dump schemes. These words are bad words, and this process is often considered a bad thing, but of course if you buy at the beginning and sell at the top it is good for you.
The trick, then, is figuring out when it is going to hit the top. I am not going to tell you how to do that, of course—it is quite hard!—but let’s talk generally about the thought process. If you are buying GameStop right now, at 1,700% or whatever above its price a month ago, you would ideally have some theory of who you are going to sell it to. “Somebody else on Reddit” is one answer. It is the standard answer, really, in bubbles and pump-and-dumps. It seems to have worked well so far, but it is not very robust. Everyone on Reddit buying the stock right now is hoping to get out before it collapses, so if your plan is to sell it to them, and their plan is to sell it to you, somebody is in trouble. Maybe not today though. Basically it can go on as long as new people keep coming to Reddit and deciding to buy GameStop. WallStreetBets, the subreddit that has been pumping GameStop, hit 3 million users yesterday. It’s at 4 million this morning. So there might be some room left to run on this theory.
You could have other theories, and Reddit absolutely does. One reason that all this is happening is that WallStreetBets posters are mad at short sellers and want to squeeze them. The idea is that short sellers, who borrow stock and sell it in order to bet that it will go down, will at some point be forced to give up and cover their shorts by buying back the stock. This is, uh, not wrong? Several short sellers have been carried out of this trade; most notably, Melvin Capital said that it closed its short position and has taken a cash injection from bigger funds to repair the hole that some redditors dug in its balance sheet. And yet short interest in GameStop remains very high, apparently above 100% of the float. 1 (You can check this on, for instance, the single-purpose website isthesqueezesquoze.com, to give you a sense of how popular this theory is.) The endgame theory here is simply that when all those short sellers capitulate, they will have to buy in the stock, and then you can sell it to them. If more than 100% of the shares are still short, then everyone who owns a share now could sell that share to a desperate short seller and get out at a profit; the short sellers would eat all the losses. 2
This is not a flawless theory or anything. As the price gets higher, other people could step in to short the stock, because it is so clearly overpriced. That is a terrifying thing to do right now but it could make you a lot of money; I suppose someone is doing it. (And keeping very quiet about it.) And as some short sellers get out, the cost and availability of stock borrow will improve for the other short sellers, making it easier for them to stay in the trade. It’s not like Apple Inc. and Tesla Inc. have zero short sellers. Short sellers can be with you forever.
Still, yes, it’s a theory: You will get out at the top by selling to short sellers, who will have to buy. And the form of that theory is very good. A theory like “I will sell to someone who has no choice but to buy, no matter the price” is much better than a theory like “I’ll try to sell to someone dumber than me.”
There are other possible forced-buyer endgames. Let me suggest the funniest possible endgame, funnier (though also less likely) than the “GameStop really is a $70 billion company” and “capitalism ends” ones. It is hinted at here:
This month’s breathtaking gains in the stock have boosted GameStop’s market value to about $24 billion, making it bigger than more than a third of the companies in the S&P 500 Index. Only Plug Power Inc. is larger in the closely watched Russell 2000 Index, a far cry from the end of 2020 when the then $1.3 billion company was firmly in the middle of that gauge.
Hmm yes. The S&P 500 Index is an index of, roughly speaking, the 500 biggest U.S. public companies by market capitalization. GameStop is not in that index, because a month ago it was a small company, in the index of 2,000 small companies. Now it is—measured by market capitalization, though nothing else—a big company. If the redditors can hold on long enough, can they get GameStop added to the S&P? Can they turn it into a big company just by bidding the stock up? If they can, then S&P 500 index funds will be forced to buy it, no matter the price, and all the redditors who brought it here can get out at a profit. And they will have a big and permanent win, and also the current version of financial capitalism—the index-fund version—will collapse in absurdity.
This is not likely just because the S&P is not purely based on market capitalization; for one thing, a company needs to have positive net income to be added to the index. 3 GameStop doesn’t. GameStop would have to go at least a little way down the path of its fundamental turnaround—it would have to start making money instead of losing it—to get into the index. You need a little bit of corporate reality for this one to work out.
I have assumed here that you bought stock at some ludicrous price and are planning to sell it for some even more ludicrous price. But plenty of the people pushing GameStop’s stock up haven’t actually done that. They’ve bought call options. Call options are a leveraged way to bet on the stock: You put in less money than if you’d bought the stock directly, but get similar upside. You also sharpen the problem of getting out. If you buy short-dated out-of-the-money call options on GameStop, and it stops going up, you don’t have to worry about finding someone to buy your stock: Your options will expire worthless and you’ll lose all your money.
Call options are also a leveraged way to push the stock up: When you buy a call option, the market maker who sells you the option buys some of the underlying stock to hedge its exposure to you, and this pushes the stock up. And then if the stock goes up more, the market maker’s exposure gets bigger, and it buys even more stock. This is sometimes called a “gamma squeeze” or “gamma trap,” we talked about it on Monday, and WallStreetBets posters are consciously exploiting it to push up the stock.
It is another sort of forced-buyer theory, sort of: The stock will keep going up because options market makers will be forced to buy it. It’s not quite as good as the other ones, though, because options market makers aren’t forced to buy the stock no matter the price. They buy the stock as long as it’s going up, but they’re forced to sell on the way down. 4 If you’re buying short-dated out-of-the-money call options on GameStop hoping to push the price up, that has worked great so far. But if it stops working—if people stop piling in to buy more call options—then it will start working in reverse. You’ve created forced buyers on the way up, but forced sellers on the way down. They’ll be competing with you to get out before it all collapses.
Turn off the stocks
Another possible endgame, for me personally, is that we all get so tired of talking about GameStop that we stop. Perhaps the stock goes up, perhaps it goes down, but we stop checking. If I were king I might be a little tempted to impose that ending by law. This guy is!
The top securities regulator in Massachusetts said the New York Stock Exchange should halt trading in GameStop stock for 30 days so it can “cool down.” Retail traders—often using options--have helped propel the stock more than 1,000% this year. On Wednesday alone, shares were up more than 100%.
“I really think at this point it calls upon the regulators, in this case, the New York Stock Exchange, to consider simply suspending it for a month and stop trading it,” William Galvin, the Secretary of the Commonwealth of Massachusetts, told Barron’s. “These small and unsophisticated investors are probably going to get hurt by this.”
Counterpoint, these small and unsophisticated investors have made absolute buckets of money by this, at the expense of large and sophisticated hedge funds. Shutting down the stock for a month because people are having too much fun does not seem exactly like it would cool things down?
Still of course one sees his point. Why is GameStop trading? Nobody in Galvin’s position—no regulator or politician or economist or CEO—goes around saying, like, “the point of the stock market is to be really fun and exciting and let people mess with each other and make some of them super rich more or less at random.” The point of the stock market is to Enable Price Discovery or Encourage Capital Formation or something boring like that. Stock markets exist so that companies can raise money to fund their projects, and so that the smartest analysts of companies can work diligently and compete fiercely to put the proper value on those companies so that we as a society can know what projects are most valuable. Stock markets exist so that regular people can invest their savings in those companies, making everyone better off: Companies get funding to pursue socially beneficial projects; regular people get an ownership stake in economic growth. Or whatever.
This theory has some obvious flaws in its real-life application, but it’s a decent theory. It is, if not exactly true, true-ish; it describes the fundamental underpinnings of the market if not necessarily its everyday operation. It posits a social purpose for financial markets, beyond making funny memes on Reddit.
It is just the case, just inevitably the case, that if you are going to have financial markets that are optimized for those purposes—that are liquid and complete, that attract smart people, that are open to everyone—they are also going to have a certain amount of nonsense. It’s not like WallStreetBets invented financial nonsense! Financial-market nonsense is, like, 70% of what we talk about around here on a normal day. How many times have I written about hedge funds tricking each other using credit default swaps? Financial markets exist to foster price discovery and capital formation, but the way they do that is mostly by letting smart people mess with each other all day. WallStreetBets is a new class of smart people messing, quite effectively, with the old ones.
The questions are how much nonsense you are willing to tolerate, and whose nonsense you are willing to tolerate. 5 There is a view that WallStreetBets’ nonsense is somehow particularly bad: It is so transparently silly, without even a bare pretense of serving the efficient allocation of capital. (Also have you read WallStreetBets? It is … uncouth.) There is another view that WallStreetBets’ nonsense is relatively good, as these things go, that the redditors are the heroes here, or at least that they’re not the real villains. If you think that Wall Street Has Gotten Away With It For Too Long, the GameStop situation gives you another opportunity to talk about that, though it is not entirely clear what you should say. Here’s Elizabeth Warren:
“For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” Warren said. “It’s long past time for the SEC and other financial regulators to wake up and do their jobs -- and with a new administration and Democrats running Congress, I intend to make sure they do.”
Do what, though? Shut down WallStreetBets? Subsidize it?
I myself have a high degree of tolerance for everyone’s nonsense. I certainly don’t think short sellers should be banned or shunned or punished for betting against companies, I agree that short selling is socially beneficial, all that boring stuff. But I also think it is funny when some redditors blow up a short hedge fund for fun, and I don’t really think they should be banned or punished either. The redditors are playing an obvious silly game, in public, on Reddit, but the hedge funds are playing a game too, and they are grown-ups and know what they’re getting into.
Of course what William Galvin actually said is not “this is all a pointless casino that serves no social purpose,” which would be broadly correct, but rather “these small and unsophisticated investors are probably going to get hurt by this.” And, yes, that is also undoubtedly true. (Almost undoubtedly; as we discussed above, the “GameStop is really worth $1,000” and “capitalism collapses into an age of abundance” options remain theoretically available.) Not all of them, of course; people who got in at $20, or $400 for that matter, and got out at $500 will do great. But a lot of people will lose money.
And … ? Here, again, the question is how much nonsense you are willing to tolerate. We have discussed before the sort of creaky U.S. rules around who can buy what sorts of risky investments, and I have proposed a simple standard. I call it the “Certificate of Dumb Investment.” Under this standard, anyone can buy diversified low-fee mutual funds to their heart’s content, but to buy dumb stuff—private placements but sure let’s say also volatile meme stocks—you have to go down to the local office of the Securities and Exchange Commission and sign a form saying that you know that what you’re doing is dumb, you know you will probably lose all your money, and you forfeit forever any right to complain. 6 Then you can do whatever dumb thing you want.
Surely WallStreetBets is … that? Like, look at it. “Like 4chan found a bloomberg terminal illness” is its motto. Everything about the site screams “this is dumb but you might enjoy it.” I mean:
WallStreetBets users have driven headfirst into bets on everything from cruise-line operators hit by the pandemic to Lumber Liquidators Holdings Inc., the company embroiled in scandal following reports that it had installed flooring with excessive amounts of formaldehyde. And they have done so unabashedly, celebrating both their victories and their losses with gusto. (The community has dubbed posting screenshots of the latter, which frequently garners thousands of upvotes, as “loss porn.”)
“A lot of other places that discuss trading are really pretentious. At WallStreetBets it’s both, ‘Look at my money!’ but also ‘Look at all this money I lost,’ and I think that’s what’s refreshing to people,” Mr. Rogozinski said.
It should be refreshing to regulators! “Hey we do trades that lose us a lot of money, it’s fun, wanna join us?”
Of course not everyone getting into GameStop now is a regular reader of WallStreetBets. But it’s not just WallStreetBets. Look around! Look at the wall-to-wall news coverage! Good Morning America! Everything! If you are getting into GameStop now, and you are a sentient human being on this planet, the two things you know are:
1. GameStop has gone up a lot and
2.This is dumb.
You’re fine! If you want to jump in now, you know it’s dumb and think it looks fun anyway. Why should William Galvin protect you from yourself?
Anyway William Galvin is not alone. There’s Adena Friedman:
Nasdaq CEO Adena Friedman suggested Wednesday that her exchange could halt trading activity for stocks, in the event they were targeted by internet users, to enable the exchange to investigate possible manipulation and allow investors to “recalibrate.”
And there is, uh, Robinhood:
Robinhood Markets and Interactive Brokers Group Inc. curbed trading in stocks including GameStop Corp. and AMC Entertainment Holdings Inc., prompting outrage from users who had pumped up the shares in a Reddit-inspired frenzy.
Robinhood, which attracted millions of new users last year as individual investors poured into the market during pandemic lockdowns, restricted transactions on those stocks and others, the brokerage said Thursday in a blog post. Interactive Brokers said it wouldn’t allow clients to take new options positions in names including AMC, GameStop and BlackBerry Ltd.
Yeah, look, I sympathize. If you keep letting people in, some of them are going to get in at the top, and then some of them are going to say, unfairly, “why did you let me in at the top?” Though of course when you stop letting people in, that might be what ends the fun—the stock plunged this morning after Robinhood’s move—and so whoever you last let in will necessarily have gotten in at the top and will sue you even more. (“Why did you let me in at the top, and why did you then cause the crash?”) Also I have to say that if Robinhood stops letting people gamble on meme stocks, that is going to hurt its ability to attract customers who want to gamble on meme stocks.
Elsewhere, the WallStreetBets subreddit itself shut down briefly. Janet Yellen is “monitoring the situation,” which I hope means she is lurking on Reddit. The Securities and Exchange Commission is also “aware of and actively monitoring the on-going market volatility in the options and equities markets,” and they are definitely lurking on Reddit.
The wrong GameStop
It’s all just too much:
A tiny West Australian mining company has been caught up in the investing craze surrounding US company GameStop thanks to its ASX code matching that of the American video game retailer.
GME Resources, which is listed on the local bourse with a market capitalisation of just $40 million, is a mining company focused on nickel and cobalt extraction. On Thursday, its shares soared more than 50 per cent to 12 cents, their highest level since 2018, with volumes of nearly $7 million.
We talk a lot about mistaken-identity stock trades around here: There is some news about a company, and people rush to buy the stock of another, tinier, worse company with a similar name. This is like that, only instead of there being news about GameStop, there is just … nonsense about GameStop. Epicycles of nonsense, buying GME Resources for no reason except that you wanted to buy GameStop for no reason.
AMC ATM
I should say that GameStop is far from the only ridiculous meme stock; there’s a lot of this going on, though there is more of it going on in GameStop than anywhere else. I recommend this recap of yesterday’s action on Reddit and in meme stocks by Bloomberg’s Sarah Ponczek and Claire Ballentine, with the accurate title “In 11 Hours of Pure Mania, 100% Stock Gains Popped Up Everywhere.” One meme stock that is popular on Reddit is AMC Entertainment Holdings, the movie-theater company. It was up 300% yesterday, why not.
In talking about GameStop, I have occasionally tried to tie the goofy stock-price dynamics to corporate finance. I suggested that maybe GameStop could sell stock at these absurd prices and use the money to, you know, be a better company. It’s tricky, selling stock at these prices, but in theory that’s what the prices are for: People are telling you that they want to buy your stock to fund your projects, so you might as well sell them the stock and do the projects.
AMC has done that! On Monday it announced that it had raised $506 million of equity (and another $411 million of debt) in various transactions that “should allow the company to make it through this dark coronavirus-impacted winter.” Good work. Even better, that same day AMC launched an at-the-market offering to sell up to 50 million shares into the market at prevailing prices, allowing it to sell opportunistically to any redditors who wanted to buy. Yesterday it announced that it had finished the offering and raised $304.8 million from that and a previous stock sale, at an average price of about $4.80 a share. Of course yesterday the stock closed at $19.90, so AMC would have done better to wait a day, but nobody’s perfect. When redditors are clamoring to buy your stock you should sell it to them before it’s too late; there’s no reason for the company to try to time the endgame perfectly.
Also yesterday holders of $600 million of AMC convertible bonds converted them into stock at a conversion price of $13.51 per share. Six hundred million dollars of debt, vaporized by Reddit enthusiasm. “In the absence of significant increases in attendance from current levels, there is substantial doubt about our ability to continue as a going concern for a reasonable period of time,” AMC warned investors on Monday; four days and a billion dollars later, there is somewhat less doubt. A week ago it was not crazy to think this company was doomed; now it is entirely possible that it will survive and thrive and show movies in movie theaters for decades to come because everyone went nuts and bought meme stocks this week. Capital formation!
AMC was trading around $9 at 11 a.m. today so I don’t really know what those convertible holders were thinking but there you go. Maybe they were thinking “wow redditors really want to buy this stock, we’d better get some stock to sell them.”
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Jan 29, 2021 03:18
because reddit won't stop buying the meme stock
