GameStop Can’t Stop, Won’t Stop

There are plenty of explainers about the GameStop thing. Here are two that sum up what happened and what else is going on.

A conspiracy theory. I want to float one idea up top. And when I say idea, I mean conspiracy. I just haven’t seen enough discussion on this: hedge fund lurkers on WSB. While it’s possible a coordinated retail bet triggered momentum/HFT trading and a mega gamma squeeze getting GME up to $20 billion in trading volume yesterday, I have an alternative. Hedge fund lurkers (picture Ben Kim or Mafee from Billions) read u/DeepFuckingValue’s short squeeze idea and pitched it to their PMs, who pulled up GME on their Bloombergs, eyed the short interest, dollar signs replaced the pupils in their eyeballs, and boom, they each dropped a hundred million into GME. This then is what really moved the stock — direct institutional activity, rather than piggybacking off retail. It’s just that the retail brats were super loud about it, too pleased with themselves. Meanwhile, it’s just one finance bro f’king over another at Melvin/Citron. Brian Koppelman and David Levien, you have my permission to use this idea for Season 6.

Robinhood chose a normal (and good) name, compared to idiot tech peer names. They could have easily chosen something inane like “Investr” or “Tradr.” Whenever the tech bubble pops, I can’t wait for the return of vowels. As for the actual Robinhooding here–robbing the rich to pay the poor. It’s a smart storyline except there are so many layers of complexity here that it’s not clear to me who robbed whom. I admit I love schadenfreude, but who are Melvin’s clients? Other than Citadel and Point72. Pensions and endowment funds are likely a good chunk of Melvin’s AUM, i.e. it could be that the actual victims are Main Streeters, not Wall Streeters.

Main Street vs. Wall Street. Calling hedge funds “investors” and Robinhood/WSBers “traders.” It’s an easy, lazy choice by the mainstream media to paint a quirky story of David/Goliath, pros vs. amateurs. However, given my theory that this is actually pros vs. pros, this is really just bros being bros. The word choices re-establish the sense of classism in the stock market, but really, who cares? The reality is everyone who throws their money into the stock market is a gambler. Each gambler has varying levels of conviction informed by data that itself is fully informed by personal bias. As a buyer of company stock, you are betting on the company’s prospects, purchasing (or selling in the case of shorting) at a price you feel is reasonable, and hoping that others agree with your view so that they buy, too, and the price up moves accordingly. As an individual or institutional investor, you are not in control of the company’s decision-making or performance. You are 100% betting on someone else’s choices in two forms: 1) company management/execution and 2) other market buyers/sellers affecting price levels. Both are fully out of your control.

Vilification of hedge funds and Wall Street.  Wall Street and the 1% have been unfairly favored in tax law, government bailouts, and even the recent coronavirus stimulus. Did we really need the Fed to buy up junk bonds? Did we really need cruise lines to stay afloat (pun intended)? We don’t need rules/gifts for the rich to get richer. We have income inequality literally built into our legislation and institutions. Also, the government really missed out on an opportunity to reform Wall Street following the 2008 bailouts. The Fed/SEC/FINRA/Congress had a chance to reform/dictate incentive structures–the real (and ongoing) cause of the outsized risk the banks took on–with the bailout terms, but they didn’t. Probably because of campaign financing. So anyway, the frustration with Wall Street is real, lingering, and I get it.

Rage Against the Machine. The manic energy and level of rage in the Twitter comments and on WSB that I’ve seen, however, is disquieting. The discussion is still mostly civil, but the energy feels similar to the rage against the establishment in politics. The Robinhood army is armed and ready to risk it all. I came across a piece by Jeremy Sonne about the sheer nihilism of WSB. He painted an unnecessarily loser-y portrait of the average WSBer and eventually got to his point that some of these losers get in on these bets simply because they have nothing (more) to lose. It’s a lottery ticket out of living in their mom’s basement. I’m also stunned by how many WSBers are sticking with the plan — to hold until the shorts implode. I would have bailed after my 4000% return. This is a weird level of commitment to schadenfreude. It’s possible that the OG WSBers are actually all out and it’s institutional money holding now, because the other reality is that there isn’t anything super interesting in the market to buy now anyway.

The vitriol against short selling is unfounded, imo. Short selling functions as a reality check on the market, frankly, which as we have seen, can go nuts. It’s fine and good to have a differing view on a company/stock. Remember The Big Short? Michael Lewis made short sellers like Michael Burry into finance nerd heroes.

Market manipulation. Is it illegal? There seems to be some debate, but in my head, it’s not. Pump and dump schemes are illegal, but that’s different. The illegal part of the pump is the fraud aspect, with people lying about the company’s prospects to hype it up and get the stock price up. There is none of that for GME. There are just a bunch of 16 year olds on Reddit agreeing that they want to play this game, knowing full well they could lose their shirts, and plan to stick with it to see the carnage. No deception or misrepresentation of intent.

I’ve also heard some argument that if a bunch of hedge funds got together to execute this short squeeze, it’d be considered collusion. Why? There are no lies involved. A group of hedge funds deciding to do the same trade together are enough to move the market, but what are the actual rules against this? I am too lazy to google “market manipulation.” Also, remember when Bill Ackman was crying about Herbalife on CNBC, and Carl Icahn called in and was like, “You loser. You’re wrong,” and initiated a huge long position and then Daniel Loeb joined in? Isn’t that almost the same thing? Sure, it’s not exactly — GME was in a unique share-scarcity situation, but that honestly is terrible risk management by Melvin Capital and Citron. That it was exploited does not seem criminal to me. Cruel? Yes. Criminal? No. In my previous post, I shared an article detailing Porsche’s short squeeze to infinity of Volkswagen stock. The victims then were also hedge funds (Einhorn, Cohen, the allstars). If that very carefully and elegantly executed short squeeze (see the language and timing of Porsche’s announcement of its massive stake) wasn’t deemed illegal, I don’t see why WSB would be liable.

Billionaires Gaming on GameStop. Elon Musk and Chamath Palihapitiya getting in on GameStop. Ugh, I’m tired. Elon evidently had an axe to grind as Melvin Capital was once short Tesla stock. He considers shorting a crime, basically, because he doesn’t understand what it means to be a publicly traded company. Remember when he sent a pile of shorts to David Einhorn when the stock surged at one point? And the Tesla short shorts he sold on the website? Everything he does annoys me.

In a CNBC interview today, Chamath pushed back against the interviewer who questioned whether WSBers were doing any real research on GameStop and other meme stocks. Chamath came to their defense, arguing yes. He noted that if you actually check out the shitshow that is WSB [my phrasing]*, there’s a huge variety of posts and range of quality on there. There are momentum trade ideas, but there are also serious researched pitches as well. And since there are many ways to trade/invest, success can hinge on sales and convincing others of your particular view. WSB sales is similar to the idea dinners/conferences/Value Investing Club-type forums that the institutional guys do — but WSB is public, transparent, messy af, and gamified in a way if we consider up/downvoting a contest to win. Everyone can access, read, decide on their own. This is as big a part of the story as the free trading/fractional shares offered by Robinhood, imo. The free trading part to me seems trivial to the “democratization” of the stock market thesis. It’s the gamification, access to information, and socialization of big investment/trade ideas. The latter makes some of the big gambles like GME truly feel like a shared social experience — a joyride with your online gaming pals while the pickings are good (i.e. while the Fed keeps rates low and prints money). The other passive factor is WSBers being home due to COVID I think. A bunch of newbs have both time and money — typically scarce resources — to play with, and with the Robinhood gamified interface, it probably really feels like just another game to try and conquer.

Gamification of trading. It’s gambling. It’s addictive. It’s problematic. Highly doubt that most of the new traders really know the mechanics of leverage and options. Remember the kid who committed suicide over the summer because Robinhood erroneously displayed his accounts, showing a huge negative balance because some trades hadn’t yet fully cleared? It’s all fun and games until someone literally dies

And the concept of a short squeeze isn’t rocket science, which is why it’s easy for anyone to buy in. I guess that’s sort of my point overall. None of it’s rocket science, whether we’re talking hedge fund or WSB. They’re all trying to do the same thing with whatever resources at hand. I really think that it’s that we saw the strategy development and execution happen real time in a highly transparent way, and watching a fund collapse as a result is uncomfortable. WSBers hyped it and celebrated it, but I really believe this whole story is less about power to the people and taking down the evil empire. It’s more about a bunch of people on both sides of a trade who wanted to make money. The former was just a byproduct of the latter.

Before this recent short squeeze story, GameStop had been on a value investor’s screen and in/out of portfolios for like a decade, always as a balance sheet play. Cash/real estate were behind the thesis. But if the argument is really real estate, have we learned nothing from Sears?

*There is no other way to describe WSB now. It is a colossal shitshow of emotional pleas on strategy, self-congratulations, and memes. It’s extremely messy and also how it differs from other investing sites. People put their feelings along with their money on the line, and that’s when people tend to make mistakes. This is also where we might draw a line between professional and amateur, though professionals are certainly dealing with their emotions, too. Professionals, however, have risk strategies in place to manage and counter precisely that.

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